Antitrust & Competition Policy Blog

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

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Tuesday, August 19, 2014

The Structure and Evolution of Buyer-Supplier Networks

Takayuki Mizuno (National Institute of Informatics, Graduate School of Economics, University of Tokyo, The Canon Institute for Global  Studies), Wataru Souma (College of Science and Technology, Nihon University) and Tsutomu Watanabe (Graduate School of Economics, University of Tokyo, The Canon Institute for Global Studies) study The Structure and Evolution of Buyer-Supplier Networks.

ABSTRACT: In this paper, we investigate the structure and evolution of customer-supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for more than 500,000 incorporated non-financial firms for the five years from 2008 to 2012. We find, first, that the number of customer links is unequal across firms; the customer link distribution has a power-law tail with an exponent of unity (i.e., it follows Zipf’s law). We interpret this as implying that competition among firms to acquire new customers yields winners with a large number of customers, as well as losers with fewer customers. We also show that the shortest path length for any pair of firms is, on average, 4.3 links. Second, we find that link switching is relatively rare. Our estimates indicate that the survival rate per year for customer links is 92 percent and for supplier links 93 percent. Third and finally, we find that! firm growth rates tend to be more highly correlated the closer two firms are to each other in a customer-supplier network (i.e., the smaller is the shortest path length for the two firms). This suggests that a non-negligible portion of fluctuations in firm growth stems from the propagation of microeconomic shocks – shocks affecting only a particular firm – through customer-supplier chains.

August 19, 2014 | Permalink | Comments (0) | TrackBack (0)

Industry structure and pricing over the business cycle

Yossi Spiegel, Tel Aviv University and Konrad Stahl, Mannheim discuss Industry structure and pricing over the business cycle.

ABSTRACT: We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is a first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is a first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.

August 19, 2014 | Permalink | Comments (0) | TrackBack (0)

Health Care Demand in the Presence of Discrete Price Changes

Michael Gerfin, University of Bern, Boris Kaiser, University of Bern and Christian Schmid University of Bern estimate Health Care Demand in the Presence of Discrete Price Changes.

ABSTRACT: Deductibles in health insurance generate nonlinear budget sets and dynamic incentives. This paper uses detailed individual claims data from a large Swiss insurance company to estimate the response in health care demand to the discrete price increase that is generated by resetting the deductible at the start of each calendar year. We use a regression discontinuity type framework based on daily data to estimate the change in health care demand right before and right after the turn of the year. We find that for individuals with high deductibles health care demand drops by 27%, which translates into an elasticity of -.21. The decrease is most pronounced for inpatient care and prescription drugs. By contrast, for individuals with low deductibles there is no significant change in health care demand (except for prescription drugs). A remaining open question is whether the observed behavioral responses can be attributed to intertemporal substitution or whether they constitute a classic moral hazard effect.

August 19, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, August 18, 2014

GCR has published The European Antitrust Review 2015

GCR has published The European Antitrust Review 2015.

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

Paying on the Margin for Medical Care: Evidence from Breast Cancer Treatments

Liran Einav, Stanford, Amy Finkelstein, MIT and Heidi Williams, MIT address Paying on the Margin for Medical Care: Evidence from Breast Cancer Treatments.

ABSTRACT: We present a simple framework to illustrate the welfare consequences of a “top up” health insurance policy that allows patients to pay the incremental price for more expensive treatment options. We contrast it with common alternative policies that require essentially no incremental payments for more expensive treatments (as in the United States), or require patients to pay the full costs of more expensive treatments (as in the United Kingdom). We provide an empirical illustration of this welfare analysis in the context of treatment choices among breast cancer patients, where lumpectomy with radiation therapy is a more expensive treatment than mastectomy, with similar average health benefits. We use variation in distance to the nearest radiation facility to estimate the relative demand for lumpectomy and mastectomy. Extrapolating the resultant demand curve (grossly) out of sample, our estimates suggest that the “to! p-up” policy, which achieves the efficient treatment decision, increases total welfare by $700-2,500 per patient relative to the current US “full coverage” policy, and by $700-1,800 per patient relative to the UK “no top up” policy. While we caution against putting much weight on our specific estimates, the analysis illustrates the potential welfare gains from more efficient reimbursement policies for medical treatments. We also briefly discuss additional tradeoffs that arise from the top-up and UK-style policies, which both lead to additional (ex-ante) risk exposure.

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

Do Credit Associations Compete with Each Other in Japanese Regional Lending Markets?

Kazumine Kondo asks Do Credit Associations Compete with Each Other in Japanese Regional Lending Markets?

ABSTRACT: This paper examines whether credit associations in Japanese regional lending markets compete on price now that Japanese financial authorities have replaced the convoy system of financial regulation with the principle of competition. Specifically, the effects of the market share of credit associations in regional markets on their lending rates are empirically investigated. Accordingly, we determined that credit associations compete with each other in regional lending markets by using two different proxies for the market share held by credit associations in a region. The first proxy was the credit associations’ share of all deposits in a region and the second was the credit associations’ share of all branch offices in a region. In addition, credit associations that face more intense competition from regional banks in regional markets were found to face more intense competition from other credit associations.  

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

Does bank market power affect SME financing constraints?

Robert M. Ryan (Central Bank of Ireland), Conor M. O'Toole (Central Bank of Ireland) and Fergal McCann (Central Bank of Ireland) ask Does bank market power affect SME financing  constraints?

ABSTRACT: This paper examines the extent to which bank market power alleviates or magnifies SME credit constraints using a large panel dataset of more than 118,000 SMEs across 20 European countries over the period 2005-2008. To our knowledge, this is the first study to examine bank market power and SME credit constraints in an international, developed economy setting. More- over, our study is the first to address a number of econometric considerations simultaneously, in particular by controlling for the availability of profitable investment opportunities using a structural Q model of investment. Our results strongly support the market power hypothesis, namely, that increased market power results in increased financing constraints for SMEs. Additionally, we find that the relationship exhibits heterogeneity across firm size and opacity in a manner that suggests that the true relationship between bank market power and financing constraints might not be fully explained by the existing theory. Finally, we find that the effect of bank market power on financing constraints increases in financial systems that are more bank dependent.

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

Competition in lending and credit ratings

Javed I. Ahmed (Board of Governors of the Federal Reserve System (U.S.)) analyzes Competition in lending and credit ratings.

ABSTRACT: This article relates corporate credit rating quality to competition in lending between the public bond market and banks. In the model, the monopolistic rating agency's choice of price and quality leads to an endogenous threshold separating low-quality bank-dependent issuers from higher-quality issuers with access to public debt. In a baseline equilibrium with expensive bank lending, this separation across debt market segments provides information, but equilibrium ratings are uninformative. A positive shock to private (bank) relative to public lending supply allows banks to compete with public lenders for high-quality issuers, which threatens rating agency profits, and informative ratings result to prevent defection of high-quality borrowers to banks. This prediction is tested by analyzing two events that increased the relative supply of private vs. public lending sharply: legislation in 1994 that reduced barriers to interstate bank lending and the temporary shutdown of the high-yield bond market in 1989. After each event, the quality of ratings (based on their impact on bond yield spreads) increased for affected issuers. The analysis suggests that strategic behavior by the rating agency in an issuer-pays setting dampens the influence of macroeconomic shocks, and explains the use of informative unsolicited credit ratings to prevent unrated bond issues, particularly during good times. Additionally, the controversial issuer-pays model of ratings leads to more efficient outcomes than investor-pays alternatives.

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

Friday, August 15, 2014

Trolls, Hopping, Ambush and Hold-up: Emerging International Approaches to the Intersection of Competition and Patent Law

Does bank market power affect SME financing constraints?

Robert M. Ryan (Central Bank of Ireland), Conor M. O'Toole (Central Bank of Ireland) and Fergal McCann (Central Bank of Ireland) ask Does bank market power affect SME financing constraints?

ABSTRACT: This paper examines the extent to which bank market power alleviates or magnifies SME credit constraints using a large panel dataset of more than 118,000 SMEs across 20 European countries over the period 2005-2008. To our knowledge, this is the first study to examine bank market power and SME credit constraints in an international, developed economy setting. More- over, our study is the first to address a number of econometric considerations simultaneously, in particular by controlling for the availability of profitable investment opportunities using a structural Q model of investment. Our results strongly support the market power hypothesis, namely, that increased market power results in increased financing constraints for SMEs. Additionally, we find that the relationship exhibits heterogeneity across firm size and opacity in a manner that suggests that the true relationship between bank market power and financing constraints might not be fully explained by the existing theory. Finally, we find that the effect of bank market power on financing constraints increases in financial systems that are more bank dependent.

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

Bank Competition and Credit Constraints in Developing Countries : New Evidence

Florian Leon, Clermont Universite, provides Bank Competition and Credit Constraints in Developing Countries : New Evidence.

ABSTRACT: Whether competition helps or hinders small firms' access to finance is in itself a much debated question in the economic literature and in policy circles, especially in the developing world. Economic theory offers conflicting predictions and empirical contributions provide mixed results. This paper considers the consequences of interbank competition on credit constraints using firm level data covering 70 developing and emerging countries. In addition to the classical concentration measures, competition is assessed by computing three non-structural measures (Lerner index, Boone indicator, and H-statistics). The results show that bank competition alleviates credit constraints, while bank concentration measures are not robust predictors of a firm's access to finance. Findings highlight that bank competition not only leads to less severe loan approval decisions but also reduces borrowers' discouragement. In addition, a secondary result of this paper documents that banking competition enhances credit availability more by reducing prices than by increasing relationship lending.

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

Litigators of the Week: Michael Hausfeld of Hausfeld LLP and William Isaacson of Boies, Schiller & Flexner

The American Lawyer crowns their Litigators of the Week: Michael Hausfeld of Hausfeld LLP and William Isaacson of Boies, Schiller & Flexner for their big win in the NCAA antitrust case (special assist to Roger Noll for his economic testimony, which the judge cited to quite a bit - should we have an economist of the week too?).

Hausfeld is one of the premier litigators of this generation. He casts a giant shadow and not merely in the antitrust bar. He also has been honored internationally for his work.

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

Measuring competition in banking : A critical review of methods

Florian Leon, Clermont Universite, is Measuring competition in banking : A critical review of methods.


ABSTRACT: Many studies have attempted to investigate the determinants and implications of competition in the banking industry. The literature on the measurement of competition can be divided between the structural and non-structural approaches. The structural approach infers the degree of competition from the structure of the market. The non-structural approach, based on the New Empirical Industrial Organization, assesses the degree of competition directly by observing behavior of firms in the market. This paper reviews the most frequently-used structural and non structural measures of competition in banking. It highlights their strengths and weaknesses, especially for studies based on a limited number of observations.

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

Thursday, August 14, 2014

Enforcement vs Deterrence in Merger Control: Can Remedies Lead to Lower Welfare?

Andreea Cosnita-Langlais (EconomiX-UMR CNRS 7532 and University Paris Ouest Nanterre La Defense) and Lars Sorgard (Department of Economics, Norwegian School of Economics and Business Administration) ask Enforcement vs Deterrence in Merger Control: Can Remedies Lead to Lower Welfare?

ABSTRACT: This paper deals with the enforcement of merger policy, and aims to identify situations where the introduction of remedies can lead to a lower welfare. For this we study how merger remedies affect the deterrence accomplished by controlling mergers, and determine the optimal frequency of investigations launched by the agency. We find that when conditional approvals are possible, it may be harder to deter the most welfare-detrimental mergers, and the agency might have to investigate mergers more often. The resulting welfare from merger control can indeed be lower than without remedies.

August 14, 2014 | Permalink | Comments (0) | TrackBack (0)

The CR4 index and the interval estimation of the Herfindahl-Hirschman Index: an empirical comparison

Maurizio Naldi (Dpt. of Computer Science and Civil Engineering, University of Rome at Tor Vergata - Universita di Roma Tor Vergata) and Marta Flamini (Universita Telematica Internazionale UNINETTUNO - Universita Telematica Internazionale UNINETTUNO) discuss the CR4 index and the interval estimation of the Herfindahl-Hirschman Index: an empirical comparison.

ABSTRACT: Concentration indices are employed to measure the level of competition within an industry. Among the several indices proposed in the literature, the Herfindahl-Hirschman Index (HHI) and the Four-firm concentration ratio (CR4) are among the most established. However, the HHI requires the market shares of all market players to be known, while the CR4 requires just the top four. In order to investigate whether we can always use the CR4 in place of the HHI, we have compared the indices resulting from a selected group of datasets. This preliminary analysis shows that the relationship between the CR4 and the HHI may not be monotonic, so that the CR4 does not preserve the order relationship established through the HHI.

August 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Formation of Bargaining Networks Via Link Sharing

Sofia Priazhkina (Department of Economics, Indiana University) and Frank Page (Department of Economics, Indiana University) describe Formation of Bargaining Networks Via Link Sharing.

ABSTRACT: This paper presents a model of collusive bargaining networks. Given a status quo network, game is played in two stages: in the first stage, pairs of sellers form the network by signing two-sided contracts that allow sellers to use connections of other sellers; in the second stage, sellers and buyers bargain for the product. We extend the notion of a pairwise Nash stability with transfers to pairwise Nash stability with contracts and characterize the subgame perfect equilibria. The equilibrium rents are determined for all firms based on their collateral and bargaining power. When a stable equilibrium exists, sharing always generates maximum social welfare and eliminates the frictions created by the network structure. The equilibria depend on the initial network setup, likewise bargaining and contractual procedures. In the homogeneous case, equilibria exist when the number of buyers and sellers are relatively unequal. When! the number of buyers exceeds number of sellers, bargaining privileges of sellers over buyers and a low sharing transfer are required for the equilibrium to exist. In the networks with relatively few monopolized sellers, sharing leads to a complete reallocation of surplus to sellers and a zero sharing transfer. When the global market is dominated by sellers, surplus is divided relatively equitably. It is also shown that in the special case of the model with only one monopolistic seller and no market entry, the sharing process organizes sellers in the supply chain order.

August 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Establishing a link between behavior ecconomics and two-sided markets

Vitor Miguel Ribeiro (FEP and CEF.UP - Vitor) is Establishing a link between behavior ecconomics and two-sided markets.

ABSTRACT: We develop a duopoly price competition model that establishes a link between the recent literature of two-sided markets and behavior economics. We fully characterize the subgame perfect Nash equilibrium, which depends on the level of fixed costs. Moreover, introducing discrimination between the two sides of the market in terms of the desutility in time, we demonstrate that divide & conquer strategies are present in equilibrium. Finally, we study entry by an inferior-quality platform and entry by a superior-quality platform to conclude that, in both cases, the entry deterrence strategy can be sustain. We conclude that, under the presence of inter-group externalities, the entry deterrence strategy occurs when price competition is softened but the inter-group externalities do not promote a higher presence of an entry deterrence strategy on the market. Finally, entry deterrence strategies may be conducted by an inferior-quality incumbent although less likely relatively to the case where the incumbent has a superior-quality.

August 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 13, 2014

Small Price Responses to Large Demand Shocks

Etienne Gagnon (Board of Governors of the Federal Reserve System (U.S.)) and  J. David Lopez-Salido (Board of Governors of the Federal Reserve System (U.S.)) analyze Small Price Responses to Large Demand Shocks.

ABSTRACT: We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.

August 13, 2014 | Permalink | Comments (0) | TrackBack (0)

Risk Aversion and Dynamic Games Between Hydroelectric Operators under Uncertainty

Abdessalem Abbassi, University of Carthage, Ahlem Dakhlaoui, Polytechnic School of Tunisia and Lota D.Tamini, Universite Laval analyze Risk Aversion and Dynamic Games Between Hydroelectric Operators under Uncertainty.

ABSTRACT: This article analyses management of hydropower dams within monopolistic and oligopolistic competition and when hydroelectricity producers are risk averse and face demand uncertainty. In each type of market structure we analytically determine the water release path in closed-loop equilibrium. We show how a monopoly can manage its hydropower dams by additional pumping or storage depending on the relative abundance of water between different regions to smooth the effect of uncertainty on electricity prices. In the oligopolistic case with symmetric risk aversion coefficient, we determine the conditions under which the relative scarcity (abundance) of water in the dam of a hydroelectric operator can favor additional strategic pumping (storage) in its competitor’s dams. When there is asymmetry of the risk aversion coefficient, the firm’s hydroelectricity production increases as its competitor’s risk aversion increases, if and only if the average recharge speed of the competitor’s dam exceeds a certain threshold, which is an increasing function of its average water inflows.

August 13, 2014 | Permalink | Comments (0) | TrackBack (0)

Four Ways to Improve Antitrust Compliance Programs

Michael Volkov has a great blog post on Four Ways to Improve Antitrust Compliance Programs.

My own thoughts (along with those of co-author Anne Riley) on the same subject are in our paper Rethinking Compliance.

August 13, 2014 | Permalink | Comments (0) | TrackBack (0)