Monday, February 13, 2017
Jan Keil, University of the West Indies at Mona, Department of Economics is Explaining the Concentration-Profitability Paradox.
ABSTRACT: This paper explains an empirical paradox which is often found, but generally ignored: a significant negative econometric relationship between profitability and market share concentration. The phenomenon can appear when there is a negative correlation between market share and costs - for example due to economies of scale. I show that concentration becomes an indicator for the cost competitiveness of direct rivals within an industry. Profitability of a given firm is undermined if price correlates positively with average industry costs (Classical natural prices) and frictions like sunk costs make an industry exit expensive for firms. This idea also explains the frequent findings of highly persistent profit rate differentials.
Andrew Leigh, Australian National University - Economics Program, Research School of Social Sciences and Adam Triggs, Australian National University (ANU) - Crawford School of Public Policy identify Markets, Monopolies and Moguls: The Relationship between Inequality and Competition.
ABSTRACT:Analysing private market research data, we estimate the degree of market concentration across 481 industries in the Australian economy. On average, the largest four firms control 36 per cent of the market. Some industries are considerably more concentrated. In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, Internet service providers, baby food and beer, the biggest four firms control more than 80 per cent of the market. We suggest ways in which high market concentration may increase inequality and discuss some policy ideas to address the problem.
Arthur Guerra Filho, King’s College London, Dickson Poon School of Law, Students and CAPES, Coordenação de Aperfeiçoamento de Pessoal de Nível Superior has written Party Funding, Competition Law and the Protection of Political Democracy.
ABSTRACT: Capitalist democracies are paradoxical: while their political system is premised on equality, their economic system is based on the promise of inequality. Bill Gates’ vote has the same weight as that of any other American citizen. On one hand capitalism is concerned with wealth creation and consumer welfare. On the other hand democracy is concerned with the voters’ equal say in the composition of the government. But what if a merger that will likely benefit consumers militates against equality in the electoral process? In order to address this tension between concentrations in the economic sphere and equality in the electoral process, I propose in this article a political antitrust concerned with the marketplace of speech in elections. The article is organised as follows. Section II argues that there was an historical relationship between party funding and competition laws in countries such as the United States, Germany and Brazil. Section III argues that recent scholarship on political antitrust has been concerned with the indirect influence of economic power over the political democratic process. Section IV suggests a framework for the regulation of direct influence; more precisely the economic power’s influence over the electoral process. I conclude that political antitrust centred on economic power’s influence over elections is promising to capitalist democracies because: (i) it may be useful to complement the party funding laws and media regulations in the protection of political democracy; and (ii) it can be largely harmonised with the standard competition law.
Friday, February 10, 2017
Frederic Jenny, ESSEC Business School provides Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment.
ABSTRACT: Competition authorities throughout the world are under pressure to use their enforcement powers to control excessive or unfair prices. In some countries, like the United States, competition authorities have clearly indicated that the antitrust laws were not meant to curb monopolistic prices. In other countries, like the European Union, excessive prices have occasionally been considered to be violations of the competition law. A vigorous debate among economists has taken place on what the definition of excessive prices could be and whether the control of excessive prices by competition authorities would in fact promote or discourage competition. This paper reviews this debate and considers alternative courses of action that competition authorities could consider in case of high prices.
Daniel Garcia-Macia, Chang-Tai Hsieh, and Peter J. Klenow ask How Destructive is Innovation?
ABSTRACT: Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all non-farm private businesses from 1976–1986 and 2003–2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.
Jan De Loecker and Paul T. Scott are offering evidence of Estimating market power Evidence from the US Brewing Industry.
ABSTRACT: While inferring markups from demand data is common practice, estimation relies on difficult-to-test assumptions, including a specific model of how firms compete. Alternatively, markups can be inferred from production data, again relying on a set of difficult-to-test assumptions, but a wholly different set, including the assumption that firms minimize costs using a variable input. Relying on data from the US brewing industry, we directly compare markup estimates from the two approaches. After implementing each approach for a broad set of assumptions and specifications, we find that both approaches provide similar and plausible markup estimates in most cases. The results illustrate how using the two strategies together can allow researchers to evaluate structural models and identify problematic assumptions.
Thursday, February 9, 2017
Mariusz Motyka-Mojkowski and Krystyna Kleiner (both Freshfields Bruckhaus Deringer LLP) describe The Pechstein Case in Germany: A Review of Sports Arbitration Clauses in Light of Competition Law.
ABSTRACT: In 2009 Claudia Pechstein, a successful German speed skater and multiple Olympic champion, was banned by the International Skating Union (‘ISU’) from all skating competitions for 2 years because of alleged illegal doping. The athletes participating in the speed skating world cup had to sign a mandatory registration form for each competition. The registration form included a dispute resolution clause (‘arbitration clause’) requiring participants to bring any challenges against an ISU decision before the Court of Arbitration for Sport (‘CAS’).
Pursuant to the arbitration clause, Ms. Pechstein appealed her suspension before the CAS, but without success. Then she filed an appeal against the CAS ruling before the Swiss courts, which also upheld the ban. At this stage of the proceedings she had not claimed unlawfulness of the arbitration clause under competition law. At the end of 2012, Ms. Pechstein finally took legal action before the German civil courts. She brought an action against the ISU and the German Speed Skating Federation (‘GSSF’) before the Regional Court of Munich (Landgericht München), requesting that the court dismisses the ban and awards her compensation for the damages she had incurred as a result of it. Her action was based on several arguments. One of them was that she could claim antitrust damages on the basis of Sec. 33 (1), 20 (1) and 19 (1) of the German Act against Restraints of Competition (‘ARC’) due to an abuse of a dominant position by the ISU in the market for organising speed skating world cups. Therefore, the imposition of the obligatory arbitration clause was abusive and the non-admission to world cups constituted an undue impediment.
Matthijs Kuijpers, Stibbe, Stefan Tuinenga, Covington, Elaine Whiteford, Covington and Thomas B. Paul, Hengeler Mueller examine Actions for Damages in the Netherlands, the United Kingdom, and Germany.
ABSTRACT: This survey will discuss the developments with regard to claims for damages resulting from competition law infringements in the three most prominent jurisdictions in this area: the Netherlands, the United Kingdom, and Germany. This survey relates to the period July 2014–July 2016.
In the previous survey covering 2013–2014, it was noted that actions for damages were still in their early stages and to a large extent related to procedural questions like jurisdiction, a stay of the legal proceedings and disclosure of documents. Although this is still the case for many actions today, more and more judgements on the merits have been issued. In this survey, a distinction will be made between claims for damages based on antitrust decisions by the European Commission (EC) or national competition authorities (follow-on damages claims) and claims that are not based on decisions from competition authorities (stand-alone damages claims).
Recent case law forms the backbone of this survey. Developments in both follow-on damages claims and stand-alone damages claims will be discussed in Sections III and IV, respectively, for each of the three jurisdictions. Legislative developments are, however, becoming increasingly important in the Netherlands, the United Kingdom, and Germany and will be discussed in Section II of this survey. The most obvious example is the directive on the rules governing actions for damages under national law for infringements of competition law (2014/104/EU) (Directive),3 which is pending implementation by EU Member States. At the same time, it cannot be denied that uncertainties have arisen since 23 June 2016, when the people of the United Kingdom voted to leave the European Union.
Accounting for Price Endogeneity in Airline Itinerary Choice Models: An Application to Continental U.S. Markets
Virginie Lurkin; Laurie A. Garrow; Matthew J. Higgins; Jeffrey P. Newman; and Michael Schyns are Accounting for Price Endogeneity in Airline Itinerary Choice Models: An Application to Continental U.S. Markets.
ABSTRACT: Network planning models, which forecast the profitability of airline schedules, support many critical decisions, including equipment purchase decisions. Network planning models include an itinerary choice model that is used to allocate air total demand in a city pair to different itineraries. Multinomial logit (MNL) models are commonly used in practice and capture how individuals make trade-offs among different itinerary attributes; however, none that we are aware of account for price endogeneity. This study formulates an itinerary choice model that is consistent with those used by industry and corrects for price endogeneity using a control function that uses several types of instrumental variables. We estimate our model using a database of more than 3 million tickets provided by the Airlines Reporting Corporation. Results based on Continental U.S. markets for May 2013 departures show that models that fail to account for price endogeneity overestimate customers’ value of time and result in biased price estimates and incorrect pricing recommendations. The size and comprehensiveness of our database allows us to estimate highly refined departure time of day preference curves that account for distance, direction of travel, number of time zones traversed, departure day of week and itinerary type (outbound, inbound or one-way). These time of day preference curves can be used by airlines, researchers, and government organizations in the evaluation of different policies such as congestion pricing.
Romain De Nijs (Ecole Polytechnique, PSE) has a paper on Behavior-based price discrimination and customer information sharing.
ABSTRACT: This article investigates the incentives and the effects of information sharing among rival firms about the identities of their past customers in a two-period model with behavior based price discrimination (BBPD). An unilateral information exchange between the two periods takes place in a subgame-perfect equilibrium. This exchange increases the ability of the industry to price discriminate consumers according to their profiles and boosts the profitability of BBPD at the expense of consumers.
Wednesday, February 8, 2017
Jacob Malone (University of Georgia, Department of Economics); Aviv Nevo (University of Pennsylvania, Department of Economics) and Jonathan Williams (University of North Carolina - Chapel Hill, Department of Economics) explain The Tragedy of the Last Mile: Congestion Externalities in Broadband Networks.
ABSTRACT: We exibly estimate demand for residential broadband accounting for congestion externalities that arise among consumers due to limited network capacity, as well as dynamics arising from nonlinear pricing. Our high frequency data permits insight into temporal patterns in usage across the day that are impacted by network congestion, and how usage responds to efforts to mitigate congestion. To estimate demand, we build a dynamic model of consumer choice and rely on variation in the timing of network upgrades and nonlinear pricing to identify the model. Using the model estimates, we calculate the welfare changes associated with different economic and technological solutions for reducing congestion, including peak-use pricing, throttling connectivity speeds, and local-cache technologies.
Seth Freedman (Indiana University); Haizhen Lin (Indiana University) and Jeff Prince (Indiana University) ask Does Competition Lead to Agglomeration or Dispersion in EMR Vendor Decisions?
ABSTRACT: We examine hospital Electronic Medical Record (EMR) vendor adoption patterns and how they relate to market structure. Hospitals have incentives to both coordinate with, and differentiate from, local competitors in their choice of vendors, with some of these incentives even linked to receipt of government subsidies through the HITECH Act of 2009. We find that hospitals tend to agglomerate in their vendor choices, and the level of agglomeration grows stronger with competition. These findings suggest that incentives to coordinate dominate incentives to differentiate overall, and the relative balance grows stronger in favor of coordination as markets become more competitive. Hence, a potential downside of hospital competition, i.e., increased difficulty in information sharing due to increased incentive to differentiate, does not appear to materialize in this market.
Christian Jaag and Christian Bach theorize about The Mailstream as a Platform.
ABSTRACT: This paper interprets the postal mailstream as a platform with two market sides in a theoretical model: On the one side of the market, advertisers (senders of direct mail) and senders of transactional mail are customers for mail services. On the other side of the market, there are the recipients. The value of direct mail for its sender depends on the quality of the mailmix, i.e. the number of transactional mail items in the mailstream. Hence, there is an interdependency between the two types of mail. This interdependency effects the equilibrium allocation, especially optimal prices. The paper analyzes these effects in two frameworks: A postal monopoly and (direct) postal competition within the mailstream as a platform. It also discusses their implications for (indirect) competition with other communication platforms. A postal monopolist has a strong incentive to lower transactional mail's price in order to increase the mail platform's attractiveness for direct mail. Electronic substitution of transactional mail thwarts these efforts. In addition, direct competition degrades the mailmix because new postal operators tend to focus on bulk and direct, rather than transactional mail. Thereby, direct competition indirectly contributes to the substitution of direct mail.
Tuesday, February 7, 2017
Bruce A. Blonigen and Justin R. Pierce offer Evidence for the Effects of Mergers on Market Power and Efficiency.
ABSTRACT: Study of the impact of mergers and acquisitions (M&As) on productivity and market power has been complicated by the difficulty of separating these two effects. We use newly-developed techniques to separately estimate productivity and markups across a wide range of industries using detailed plant-level data. Employing a difference-in-differences framework, we find that M&As are associated with increases in average markups, but find little evidence for effects on plant-level productivity. We also examine whether M&As increase efficiency through reallocation of production to more efficient plants or through reductions in administrative operations, but again find little evidence for these channels, on average. The results are robust to a range of approaches to address the endogeneity of firms' merger decisions.
Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets
Herr, Annika and Suppliet, Moritz (Tilburg University, Center For Economic Research) explore Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets.
ABSTRACT: Health insurances curb price insensitive behavior and moral hazard of insureds through different types of cost-sharing, such as tiered co-payments or reference pricing. This paper evaluates the effect of newly introduced price limits below which drugs are exempt from co-payments on the pricing strategies of drug manufacturers in reference price markets. We exploit quarterly data on all prescription drugs under reference pricing available in Germany from 2007 to 2010. To identify causal effects, we use instruments that proxy regulation intensity. A difference-in-differences approach exploits the fact that the exemption policy was introduced successively during this period. Our main results first show that the new policy led generic firms to decrease prices by 5 percent on average, while brand-name firms increase prices by 7 percent after the introduction. Second, sales increased for exempt products. Third, we find evidence that differentiated health insurance coverage (public versus private) explains the identifed market segmentation.
Garcia, Daniel and Janssen, Maarten investigate Retail Channel Management in Consumer Search Markets.
ABSTRACT: We study how a monopoly manufacturer optimally manages her contractual relations with retailers in markets with consumer search. By choosing wholesale prices, the manufacturer affects the degree of competition between retailers and the incentives of consumers to search. We show that depending on whether or not the manufacturer can commit to her price decisions and on the search cost, the manufacturer may be substantially better off choosing her wholesale prices not independent of each other, consciously allowing for asymmetric contracts. Thus, our analysis may shed light on when we may expect sales across different retailers to be positively or negatively correlated. Our model may be able to generate loss leaders at the wholesale level and show the rationale for creating ”premium resellers”.
Gaston Llanes (Pontificia Universidad Catolica de Chile); Andrea Mantovani (Department of Economics, University of Bologna); and Francisco Ruiz-Aliseda (Pontificia Universidad Catolica de Chile) examine Entry into complementary good markets with network effects.
ABSTRACT: We examine whether an incumbent active in a market with strong network effects can be challenged by an entrant already active in the market of a complementary good. When only the entrant benefits from such a complementarity in the network market, we find that it can conquer such a market if and only if the degree of complementarity is large enough. In such cases, the entrant may use the network good as a loss-leader so as to expand the market of the complementary good. When the incumbent's network good is enhanced too by the existence of the complementary good, we study if the entrant is better or worse off. Finally, we argue that, even though pure bundling may be an effective entry strategy and it may be socially desirable, it may be harmful for the entrant to use it.
Monday, February 6, 2017
Jean Gabszewicz, Jean ; Marini, Marco A. ; Tarola, Ornella ask Vertical differentiation and collusion: pruning or proliferation?
ABSTRACT: In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multi-product firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market.
Anne Rodgers, Peter Scott, Arnaud Sanz, and D. Michael Brown (all Norton Rose) describe Emerging Issues in Third-Party Litigation Funding: What Antitrust Lawyers Need to Know.
ABSTRACT: Both antitrust litigation and third-party funding are increasing globally. Indeed, the two phenomena may feed off each other—more funders fund antitrust litigation because there is more of it, and there is more of it because there is more funding. Third-party litigation funding generally means that someone other than a party, the party’s counsel, or other entity with a preexisting contractual relationship with the party (like an indemnitor or liability insurer) provides non-recourse funding for a dispute. In its early days, funding involved a third-party investor’s providing funds to prosecute a plaintiff’s claim (often personal injury) in exchange for a portion of the settlement or judgment proceeds from the case. Today, the increasing prevalence of third-party funding has precipitated a number of related legal developments around the world. It looks like third-party funding is here to stay and we, as antitrust lawyers, need to know more about it. In this article we discuss the basics of third-party litigation funding and various funding-related regulatory and legal developments. We interviewed a number of third-party litigation funders while preparing the article, and provide their perspectives and insights. ,P. Our focus is on the United States, the European Union, the United Kingdom, and Canada because the funders we interviewed identified those jurisdictions as the most attractive prospects for litigation funding in our interviews (although Canada to a lesser extent)
Employers Beware:The DOJ and FTC Confirm that Naked Wage-Fixing and “No-Poaching” Agreements Are Per Se Antitrust Violations
Michael Lindsay, Jaime Stilson, and Rebecca Bernhard (all Dorsey) admonish Employers Beware:The DOJ and FTC Confirm that Naked Wage-Fixing and “No-Poaching” Agreements Are Per Se Antitrust Violations.
ABSTRACT: Everyone knows that price fixing among competing sellers is illegal, but price fixing by buyers can also violate the antitrust laws. Every company with employees is a “buyer” of employees’ services, and human resources (HR) managers should understand that the antitrust laws apply to agreements relating to the buying of those services, whether or not the purchasing employers are competitors in their downstream markets. In other words, employers can be liable for antitrust violations that reduce competition in an employment market even if the employees do not make (and the employers do not sell) competing products. In October, the nation’s two leading antitrust enforcers—the Federal Trade Commission and the U.S. Department of Justice’s Antitrust Division—published Antitrust Guidance for Human Resources Professionals reminding (or, in some cases, informing) employers and HR personnel that the antitrust laws apply. 1 The HR Guidance also puts employers and HR personnel on notice that the antitrust laws will be strictly enforced to prevent agreements that restrain competition in the employment market. Consistent with past enforcement actions and cases, the HR Guidance confirms that certain types of wage-fixing and no-poaching agreements2 will be treated as per se violations. Moreover, the HR Guidance explicitly states that the DOJ will treat at least some cases of naked wage-fixing and no-poaching agreements as criminal antitrust violations. To antitrust practitioners, the HR Guidance should come as no surprise. Price fixing and market allocation by buyers has never been immune from antitrust scrutiny. The HR Guidance provides antitrust practitioners with a useful tool for educating HR personnel about antitrust risks and for demonstrating that HR practices are now squarely in the crosshairs of antitrust enforcement. In this article, we review some of the substantive principles set forth in the HR Guidance, the key legal developments that led up to the issuance of the HR Guidance, the kinds of ancillary agreements that escape per se condemnation, and some practical tips for employers and HR professionals looking to steer clear of potential antitrust scrutiny.