Antitrust & Competition Policy Blog

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

Thursday, July 14, 2016

Parallel Trade of Pharmaceuticals: The Danish Market for Statins

Susan J. Mendez (Melbourne Institute of Applied Economics and Social Research, The University of Melbourne) studies Parallel Trade of Pharmaceuticals: The Danish Market for Statins.

ABSTRACT: The goal of this paper is to investigate and quantify the impact of parallel trade in markets for pharmaceuticals. The paper develops a structural model of demand and supply using data on prices, sales and characteristics of statins, medicines used in the treatment for high cholesterol, in Denmark. The model provides a framework to simulate outcomes under a complete ban of parallel imports, keeping other regulatory schemes unchanged. There are two sets of key results from prohibiting parallel imports. The first set focuses on price effects, which differ substantially along two dimensions: the patent protection status of the molecule and the type of the firm. On average, prices increase more in markets where the molecule has lost patent protection. On the other dimension, both generic firms and original producers increase their pharmacy purchase prices when competition from parallel importers is removed. Given the prevailing reimbursement rules, most chang! es in pharmacy purchase prices are absorbed by the government. The final price paid by consumers after reimbursement increases more for original firms than for generic producers. The second set of empirical results reports the effects on market participants. My model takes into consideration consumers’ preferences allowing them to substitute between products. Prohibiting parallel imports induces consumers to substitute towards original products for which they have stronger preferences. In sum, banning parallel imports leads to (i) an increase in variable profits for original producers and a decrease for generic firms, (ii) an increase in governmental health care expenditures, and (iii) a decrease in consumers’ welfare. Classification- I18, H51

July 14, 2016 | Permalink | Comments (0)

Bargaining over entry with a compulsory license deadline: Price spillovers and surplus expansion

Eric W Bond (Vanderbilt University) and Kamal Saggi (Vanderbilt University) are Bargaining over entry with a compulsory license deadline: Price spillovers and surplus expansion.

ABSTRACT: We analyze bargaining between a developing country (South) and a multinational firm over the local price of its patented product. We use an alternating offers bargaining game in which the South can resort to compulsory licensing (CL) if the two parties fail to reach agreement by a certain deadline. The presence of international price spillovers introduces two novel features into the standard bargaining problem: (i) the surplus from entry prior to the CL deadline may be negative and (ii) CL can yield higher surplus than entry. We establish conditions under which equilibrium may exhibit immediate entry, preemptive entry just prior to the CL deadline, or the occurrence of CL. The South necessarily gains from the threat of CL if the joint payoff under entry is higher relative to CL but can lose if it is lower.

July 14, 2016 | Permalink | Comments (0)

Assessment of Post-merger Coordinated Effects: Characterization by Simulations

Ivaldi, Marc and Lagos, Vicente provide an Assessment of Post-merger Coordinated Effects: Characterization by Simulations.

ABSTRACT: This paper aims to evaluate the coordinated effects of horizontal mergers by simulating its impact on firms’ critical discount factors. The simulation setting considers a model with a random coefficient discrete choice demand and heterogeneous price-setting firms on the supply side. The results suggest that mergers strengthen the incentives to collude among merging parties, but weaken the incentives of non-merging parties. In addition, while the magnitude of this impact is moderate for the latter, it can be substantial for merging parties. Finally, general policy lessons regarding the assessment of the magnitude of these effects can be drawn from the results.

July 14, 2016 | Permalink | Comments (0)

A Test of the Theory of Nonrenewable Resources - Controlling for Exploration and Market Power

Malischek, Raimund (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)) and Tode, Christian (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)) offer A Test of the Theory of Nonrenewable Resources - Controlling for Exploration and Market Power.

ABSTRACT: Despite the central role of the Hotelling model within the theory of nonrenewable resources, tests of the model are rarely found. If existent, these tests tend to ignore two key features, namely market power and exploration. We therefore suggest an extension of the basic Hotelling framework to incorporate exploration activity and market power and propose an implicit price behavior test of the model to indicate whether firms undergo inter-temporal optimization. When applied to a newly constructed data set for the uranium mining industry, the null hypothesis of the firm optimizing inter-temporally is rejected in all settings. However, parameter estimates of the model still yield valuable information on cost structure, resource scarcity and market power. Our results suggest that the shadow price of the resource in situ is comparably small and may be overshadowed by market power, which may serve as an explanation for the firm failing to optimize inter-temp! orally.

July 14, 2016 | Permalink | Comments (0)

Wednesday, July 13, 2016

Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities

De Francesco, Massimo A. ; Salvadori, Neri examine Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities.

ABSTRACT: The paper is the second part of a trilogy in which we extend the analysis of price competition among capacity-constrained sellers beyond duopoly to triopoly. In the first part of the trilogy we provided some general results, highlighting features of a duopolistic mixed strategy equilibrium that generalize to triopoly and provided a first partition concerning the pure strategy equilibrium regions and the mixed strategies equilibrium region and then the partition of this region in a part in which the payoffs of the two smallest firm are proportional to their capacities and another in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. In this paper we provide a complete characterization of the set of mixed strategy equilibria in the part in which the payoffs of the two smallest firms are proportional to their capacities. This part is partitioned according to equilibrium features and in each part it is determined! whether equilibria are uniquely determined or not and in the latter case it is proved that the equilibria constitute a continuum. Further we determine the circustances in which supports of an equilibrium strategy may be disconnected and show how gaps are then determined. We also prove that the union of supports is indeed connected, a property which cannot be extended to the case in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. The third part of the trilogy will be devoted to a complete characterization of the mixed strategy equilibria when the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. This will allow also to determine the payoff of the smallest firm.

July 13, 2016 | Permalink | Comments (0)

Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market

Ken Onishi (School of Economics, Singapore Management University) ; Naoki Wakamori (Faculty of Economics, The University of Tokyo) ; Chiyo Hashimoto (Japan Medical Association) ; Shun-ichiro Bessho (Faculty of Economics, Keio University) identify Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market.

ABSTRACT:  This paper quantifies the social inefficiency that arises from the medical arms race in the context of MRI adoption. We construct a novel dataset that contains a complete list of medical institutions and includes their characteristics, MRI ownership and utilization information, and data on patient co-payments and medical institution reimbursements. Using the data, the paper builds and estimates a vertical industry model where MRI manufacturers sell MRIs and hospitals purchase MRIs ("free entry") in the upstream market, and hospitals provide medical services to patients in the downstream market. The estimated model allows us to evaluate potential policy interventions. Simulation results suggest that the current "laissez-faire" policy in Japan leads to excess MRI adoption, resulting in lower social welfare compared the regulation style used in France. Furthermore, softening competition in the upstream market via collusive agreement or mergers among upstream! firms would increase social welfare substantially by reducing excess MRI adoption and mitigating the business-stealing effect in the downstream market. These findings shed light on the mechanism behind the social inefficiency of medical arms races and offer new insight into antitrust policies in industries with vertical structure.

July 13, 2016 | Permalink | Comments (0)

Monopoly price discrimination and privacy: the hidden cost of hiding

BELLEFLAMME, P. (Universite catholique de Louvain, CORE, Belgium) writes on Monopoly price discrimination and privacy: the hidden cost of hiding.

ABSTRACT: A monopolist can use a ‘tracking’ technology that allows it to identify a consumer's willingness to pay with some probability. Consumers can counteract tracking by acquiring a ‘hiding’ technology. We show in this note that consumers are collectively better off when this hiding technology is not available, even when consumers can acquire it free of charge.

July 13, 2016 | Permalink | Comments (0)

Tuesday, July 12, 2016

Pricing when customers have limited attention

Tamer Boyaci (ESMT European School of Management and Technology) ; Yalcin Akcay (College of Administrative Sciences and Economics, Koc University) study Pricing when customers have limited attention.

ABSTRACT: We study the optimal pricing problem of a firm facing customers with limited attention and capability to process information about the value (quality) of the offered products. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true qualities and prices, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem and characterize the pricing and revenue implications of customer’s limited attention. We test the robustness of our results under various modelling generalizations such as prices signaling quality and customer heterogeneity, and study extensions such as multiple products, competition, and joint inventory and pricing decisions. We also show that using alternative pricing policies that ignore the limited attention of customers or their ability to! allocate this attention judiciously can potentially lead to significant profit losses for the firm. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

July 12, 2016 | Permalink | Comments (0)

Identifying Collusion in English Auctions

Kaplan, Uma ; Marmer, Vadim ; Shneyerov, Artyom are Identifying Collusion in English Auctions.

ABSTRACT: We develop a fully nonparametric identification framework and a test of collusion in ascending bid auctions. Assuming efficient collusion, we show that the underlying distributions of values can be identified despite collusive behaviour when there is at least one bidder outside the cartel. We propose a nonparametric estimation procedure for the distributions of values and a bootstrap test of the null hypothesis of competitive behaviour against the alternative of collusion. Our framework allows for asymmetric bidders, and the test can be performed on individual bidders. The test is applied to the Guaranteed Investment Certificate auctions conducted by US municipalities over the Internet. Despite the fact that there have been allegations of collusion in this market, our test does not detect deviations from competition. A plausible explanation of this finding is that the Internet auction design involves very limited information disclosure.

July 12, 2016 | Permalink | Comments (0)

Competition and corporate control in partial ownership acquisitions

Stühmeier, Torben studies Competition and corporate control in partial ownership acquisitions.

ABSTRACT:  Competition authorities have a growing interest in assessing the effects of partial ownership arrangements. We show that the effects of such agreements on competition and welfare depend on the intensity of competition in the market and on the firms' governance structure. When assessing the effects of partial ownership, competition policy has to consider both the financial interest and level of control of the acquiring firm in the target firm.

July 12, 2016 | Permalink | Comments (0)

Monday, July 11, 2016

Core Existence in Vertically Differentiated Markets

Jean J. Gabszewicz (CORE, Universite' Catholique de Louvain, Belgium) ; Marco A. Marini (Department of Computer, Control and Management Engineering Antonio Ruberti (DIAG), University of Rome La Sapienza, Rome, Italy) ; Ornella Tarola (University of Rome La Sapienza, Rome, Italy) examine Core Existence in Vertically Differentiated Markets.

ABSTRACT: We prove that a sufficient condition for the core existence in a n-firm vertically differentiated market is that the qualities of firms’s products are equally-spaced along the quality spectrum. This result contributes to see that a fully collusive agreement among firms in such markets is more easily reachable when product qualities are not distributed too asymmetrically along the quality ladder.

July 11, 2016 | Permalink | Comments (0)

Not So Demanding: Demand Structure and Firm Behavior

Mrazova, Monika and Neary, J Peter explains Not So Demanding: Demand Structure and Firm Behavior.

ABSTRACT: We show that any well-behaved demand function can be represented by its demand manifold, a smooth curve which relates the elasticity and convexity of demand. This manifold is a sufficient statistic for many comparative statics questions; leads naturally to characterizations of new families of demand functions which nest most of those used in applied economics; and connects assumptions about demand structure with firm behavior and economic performance. In particular, we show that the demand manifold leads to new insights about industry adjustment with heterogeneous firms, and provides a quantitative framework for measuring the effects of globalization.

July 11, 2016 | Permalink | Comments (0)

Switching Costs in Two-sided Markets

LAM, W. (University of Liege) studies Switching Costs in Two-sided Markets.

ABSTRACT:  In many markets, there are switching costs and network effects. Yet the literature gen- erally deals with these two concepts separately. This paper bridges the gap by analyzing their interaction effects (or “indirect bargain”) in a dynamic two-sided market. I show that in a symmetric equilibrium, the classic result that the first-period price is U-shape in switching costs does not emerge, but instead switching costs always intensify first-period price competition. Moreover, an increase in switching costs on one side decreases the first- period price on the other side. Thus policies that ignore these effects may underestimate the welfare-enhancing effects of switching costs.

July 11, 2016 | Permalink | Comments (0)

Friday, July 8, 2016

Evolutionary Competition between Adjustment Processes in Cournot Oligopoly: Instability and Complex Dynamics

Cars H. Hommes ; Marius I. Ochea ; Jan Tuinstra (Universite de Cergy-Pontoise, THEMA) examine Evolutionary Competition between Adjustment Processes in Cournot Oligopoly: Instability and Complex Dynamics.

ABSTRACT: We introduce evolutionary competition between adjustment processes in the Cournot oligopoly model. Our main focus is on rational play versus a general short-memory adaptive adjustment process. We nd that, although rational play has a stabilizing influence, a sufficient increase in the number of rms in the market tends to make the Cournot-Nash equilibrium unstable. Moreover, the interaction between adjustment processes naturally leads to the emergence of complicated endogenous uctuations as the number of rms increases, even when demand and costs are linear.

July 8, 2016 | Permalink | Comments (0)

Call for papers: 14th Annual ACE Conference: 17-18 November 2016, University of Amsterdam

14th Annual ACE Conference: 17-18 November 2016, University of Amsterdam

We are encouraging competition economists (academics, consultants, agency members) interested in the work of ACE to submit a proposal for a case presentation at the 14th Annual ACE Conference, which will take place on 17th and 18th November 2016 at the University of Amsterdam. The submission should include a brief (one page) summary of the facts and economic aspects of the case as well as a discussion of why the case may be of particular interest to the ACE community. The submission may also include suggestions of academics, consultants and agency members who would seem appropriate to present or discuss the case at the conference. Please also specify whether a public version of the decision by the relevant competition agency is available, and the language of the decision.

The deadline for submission of case proposals is September 15 2016. Submissions should be sent be email to the ACE Secretariat (dagny.kristiansen@nhh.no).

http://www.competitioneconomics.org/

 

July 8, 2016 | Permalink | Comments (0)

The Antitrust Contributions of Roger Blair

D. Daniel Sokol, University of Florida has written The Antitrust Contributions of Roger Blair.

ABSTRACT: Roger Blair has made a significant impact on the fields of antitrust law and economics. Roger’s scholarship can be divided into a number of themes: intellectual property and innovation, health care, vertical restraints (including franchising), goals of antitrust, buyer power, economic evidence and expertise, remedies, sports, efficiencies, and private enforcement of antitrust. This essay surveys his work and a special issue of the Antitrust Bulletin devoted to Blair's writing.

July 8, 2016 | Permalink | Comments (0)

Toward a theory of monopolistic competition

Parenti, M. (Universite catholique de Louvain, CORE, Belgium) ; Ushchev, P. (NRU-Higher School of Economics) ; Thisse, J.-F. (Universite catholique de Louvain, CORE, Belgium) move Toward a theory of monopolistic competition.

ABSTRACT:  We propose a general model of monopolistic competition with unspecified preferences. Our analysis applies to the case of symmetric/asymmetric preferences and costs. Our basic tool is the elasticity of substitution function, which is shown to depend on the actions taken by firms. We impose intuitive conditions on this function to guarantee the existence of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shocks (the pass-through rate) is conducted by means of necessary and sufficient conditions in the case of symmetric firms.

July 8, 2016 | Permalink | Comments (0)

Thursday, July 7, 2016

Catching-Up with EU Due Process Standards. A Case of Poland's Soft Law Guidelines

Maciej Bernatt, University of Warsaw, Centre for Antitrust and Regulatory Studies is Catching-Up with EU Due Process Standards. A Case of Poland's Soft Law Guidelines.

ABSTRACT: The Article discusses how soft law guidelines can be used to achieve greater convergence with EU procedural rules in relation to undertakings’ due process rights as well as national competition authorities (NCAs) greater transparency. The approach taken in this respect in 2015 by Polish competition authority (Prezes Urzedu Ochrony Konkurencji i Konsumentow, UOKiK) is novel and possible to be envisaged by other NCAs. The UOKiK - in reaction to criticism voiced in Poland for some time - adopted guidelines introducing EU-like statement of objections:

(1) guidelines regulating undertakings direct contact with UOKiK representatives,

(2) new policy concerning publication of all judicial rulings reviewing the UOKiK decisions,

(3) and new policy concerning public access to UOKiK market analysis.

(4) In addition, internal evaluation committee inside the UOKiK was established.

This Article presents these developments. It also discusses potential risks stemming from taking soft-law approach in the field of defense rights.

July 7, 2016 | Permalink | Comments (0)

Reverse Payments: An EU and US Perspective

Frank P. Maier-Rigaud, IESEG School of Management (LEM-CNRS), Department of Economics and Quantitative Methods; NERA Economic Consulting Nathan Blalock, NERA Economic Consulting, Oliver Gannon, NERA Economic Consulting provide an overview of Reverse Payments: An EU and US Perspective.

ABSTRACT: In recent years, reverse payment settlements in the pharmaceutical industry have attracted the attention of US and European competition authorities. Originator pharmaceutical companies facing patent challenges from generic companies may be incentivized to reach terms of settlement prior to a ruling at trial. Reverse payment settlements occur when the terms of settlement contain a transfer of value from the originator to the generic company. Competition authorities in particular are interested in reverse payment settlements that potentially delay the entry of the generic company’s competing pharmaceutical product. The chapter reviews and compares the approaches of the US and European competition authorities in investigating reverse payment settlements.

It also examines the economic incentives faced by originators and generic companies that result from the patent system and pharmaceutical regulatory framework in which they operate. When combined with originators’ and generic companies’ diverging beliefs as to the validity of the patent in question, these incentives lead to a set of feasible reverse payment settlement outcomes that include both a transfer of value and a specified date of generic entry. Economic theory indicates that, under certain circumstances, a set of reverse payment settlements that result in the delay of generic entry can be beneficial to the health systems and patients that pay for pharmaceutical products. This kind of beneficial settlement allows litigating parties to avoid costly and time consuming litigation and establishes a generic entry date that is earlier than the counterfactual (probability weighted) expected date of entry.

Given the potential benefits from certain reverse payment settlements, it is that competition authorities investigating reverse payment settlements should use an effects based approach to ensure that potential benefits of such settlements to health care systems and patients are not overlooked in the analysis.

July 7, 2016 | Permalink | Comments (0)

Remedies for Breaches of EU Antitrust Law

Cyril Ritter, European Commission -- Directorate General for Competition discusses Remedies for Breaches of EU Antitrust Law.

ABSTRACT: This paper concerns remedies in the European Commission's antitrust infringement decisions under Article 7 of Regulation no. 1/2003, as distinct from commitments under Article 9 of the same regulation, and remedies under the Merger Regulation. This paper tries to answer four questions: What are remedies for? When can the Commission impose them? What kind of remedies? And what is the framework for enforcing remedies?

 

 

July 7, 2016 | Permalink | Comments (0)