Thursday, July 17, 2014
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
- Julian Pena, Jul 16, 2014
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)
- Paulo Furquim de Azevedo, Jul 16, 2014
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)
- Gerardo Calderon-Villegas, Jul 16, 2014
The new Mexican Antitrust Law introduces novel concepts aimed at increasing competition in all product and service markets. Gerardo Calderon (Baker & McKenzie)
- Victor Pavon-Villamayor, Jul 16, 2014
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)
- Claudio Agostini, Manuel Willington, Jul 16, 2014
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)
- Paulo Leonardo Casagrande, Jul 16, 2014
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)
- Julian Pena, Jul 16, 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
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
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.
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.
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.
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.
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.
Wednesday, July 16, 2014
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. --
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.
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.
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.
Tuesday, July 15, 2014
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.
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.
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.
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.
Caspar Siegert (Munich) and Robert Ulbricht (Toulouse) offer 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.
Monday, July 14, 2014
Uwe Dulleck, QUT, Rudolf Kerschbamer, University of Innsbruck and Alexander Konovalov, University of Gothenburg ask Too much or too little? Price-discrimination in a market for credence goods.
ABSTRACT: In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality.
The Effectiveness of Competition Policy: An Econometric Assessment in Developed and Developing Countries
Danilo Sama (LUISS) explores The Effectiveness of Competition Policy: An Econometric Assessment in Developed and Developing Countries.
ABSTRACT: The ultimate objective of the present paper is to empirically investigate the effectiveness of competition policy in developed and developing countries. Although its importance is continuously increasing, the effectiveness of competition policy still seems to lack the attention that it would deserve. At the present state of art, the number of academic contributions that attempts to estimate its impact on relevant economic variables appears very limited, in particular for the less developed countries. However, an empirical literature aimed at measuring in objective terms the effect of competition policy on economic growth is emerging, starting from narrow variables of interest, such as Gross Domestic Product and Total Factor Productivity. As a result, the principal aim of the current work is to contribute to this branch of research, focusing on broader indicators of market performance, in order to understand whether the presence of an antitrust authority has a significant impact, thus an effective utility, on the level of competition of a country.
Yvonne Zavelberg, Christine Wieck, Thomas Heckelei, all University of Bonn discuss Entry deterring effects of contractual relations in the dairy processing sector.
ABSTRACT: In 2010, the European (EU) High Level Expert Group on milk proposed the introduction of standard contracts between raw milk producers and processors to improve the bargaining position of producers and to stabilize the market by balancing dairy supply and demand. However, contracts may distort competition and deter market entry of rival dairies. We analyze competitive effects of contracts between dairy producers and processors by constructing a game theoretic model. We show that an incumbent dairy can deter a rival dairy’s market entry by offering an exclusive contract to a risk averse producer.
Cassey LEE (University of Wollongong) describes Competition Law Enforcement in Malaysia: Some Recent Developments.
ABSTRACT: The enactment of the Competition Act 2010 represents a significant progress in the implementation of competition policy in Malaysia. The Malaysian Competition Commission has been fairly successful in its enforcement activities especially in price fixing cases involving trade associations. It has also investigated and issued proposed decisions in a number of high profile cases involving Malaysian Airlines, AirAsia, and Megasteel. Future challenges are likely to involve investigation of more complex anti-competitive cases, review of government regulations with impact on competition, possible introduction of merger controls and regional integration.