Wednesday, March 8, 2017
Liangliang Jiang, Ross Levine, and Chen Lin ask Does Competition Affect Bank Risk?
Abstract: Although policymakers often discuss tradeoffs between bank competition and stability, past research provides differing theoretical perspectives and empirical results on the impact of competition on risk. In this paper, we employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and discover that an intensification of competition materially boosts bank risk. With respect to the mechanisms, we find that competition reduces bank profits, charter values, and relationship lending and increases banks' provision of nontraditional banking services.
Tuesday, March 7, 2017
Heidi L. Williams asks How Do Patents Affect Research Investments?
Abstract: While patent systems have been widely used both historically and internationally, there is nonetheless a tremendous amount of controversy over whether patent systems - in practice - improve the alignment between private returns and social contributions. In this paper, I describe three parameters - how the disclosure function affects research investments, how patent strength affects research investments in new technologies, and how patents on existing technologies affect follow-on innovation - needed to inform the question of how patents affect research investments, and review the available evidence which has attempted to empirically estimate these parameters.
Margaret Kyle and Heidi L. Williams ask Is American Health Care Uniquely Inefficient? Evidence from Prescription Drugs.
Abstract: Alan Garber and Jonathan Skinner (2008) famously conjectured that the US health care system was "uniquely inefficient" relative to other countries. We test this idea using cross-country data on prescription drug sales newly linked with an arguably objective measure of relative therapeutic benefits, or drug quality. Specifically, we investigate how higher and lower quality drugs diffuse in the US relative to Australia, Canada, Switzerland, and the UK. Our tabulations suggest that lower quality drugs diffuse more in the US relative to high quality drugs, compared to each of our four comparison countries - consistent with Garber and Skinner's conjecture.
Debasmita Basak, Swansea University and Arijit Mukherjee, University of Nottingham - School of Economics have written Price vs. Quantity Competition in a Vertically Related Market Revisited.
ABSTRACT: In a recent paper, Alipranti et al. (2014, Price vs. quantity competition in a vertically related market, Economics Letters, 124: 122-126) show that in a vertically related market Cournot competition yields higher social welfare compared to Bertrand competition if the upstream firm subsidises the quantity setting downstream firm’s production via negative wholesale input prices. However, the assumption of negative input prices is not economically viable as it would encourage the downstream firms to buy an unbounded amount of inputs knowing that the upstream firm would pay the downstream firms for each unit of input they purchase. We show that the welfare ranking may be reversed once we introduce a non-negativity constraint on the input price.
Jeff Harrison, University of Florida offers Some Inconvenient Truths About Antitrust Law and Economics.
ABSTRACT: For years those teaching and writing about antitrust law have stressed three basic goals - consumer surplus, allocative efficiency, and productive efficiency. Rarely, if ever, are the limitations of those goals revealed to readers. For example, in determining costs of production, external costs are not accounted for. This means that the firm most able to externalize its cost by one means or another will appear to be the more efficient and will be given broad leeway as far as avoiding liability. The Essay discusses this and other problems inherent in the goals set out for antitrust law.
Monday, March 6, 2017
Gerben de Jong, VU University Amsterdam, C.L. Behrens, VU University Amsterdam, Hester van Herk, VU University Amsterdam, and Erik T. Verhoef, VU University Amsterdam - Department of Spatial Economics; VU University Amsterdam - Faculty of Economics and Business Administration; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) study Domestic Market Power in the International Airline Industry.
ABSTRACT: We posit and empirically test the hypothesis that airlines are able to charge a fare premium in markets that originate in their domestic country relative to similar markets that originate in foreign countries. To this end, we focus on intercontinental one-stop air travel trips for which the main, intercontinental, flight legs are identical, while the feeder legs depart from a mixture of domestic- and foreign origins. We collect a unique database of published fares for such trips and estimate reduced form fare regressions with main flight leg fixed effects. We find that trips from and to domestic airports (compared with foreign airports) are characterized by about 9.5 per cent higher fares, even after adding controls for airport dominance, trip operating costs, the competitive environment and origin catchment area characteristics. These findings demonstrate that airlines have substantial domestic market power, enabling them to raise fares at their domestic airports irrespective of aforementioned market conditions. The magnitude of this domestic country effect is large relative to the traditional airport dominance effect, suggesting that the distinction between domestic- and foreign origins is a crucial determinant of the degree of market power that airlines can exert in the international airline industry.
Jan Broulík, Tilburg University, Tilburg Law School, Tilburg Law and Economics Center (TILEC); Charles University in Prague, Faculty of Law offers Economics in Antitrust Enforcement and the Private Benefit of Scholarly Commentators.
ABSTRACT: Academic commentators maintain advocating more economics in antitrust enforcement than it would be optimal from the societal point of view. It has been proposed that this advocacy arises from the private benefit that the commentators obtain from the enforcement use of economics. This article examines the plausibility of this proposition. It compiles the available data on the size of business and employment opportunities for antitrust practitioners to show that there is a significant private benefit associated with the enforcement use of economics. Because the boundary between antitrust practice and academia is permeable, this private benefit is capable of distorting the scholarly commentary. Literature on an analogous issue advances that such distortions of the academic discourse arising from practice-related benefits enjoyed by academic commentators are not rare. Additional incentives come from big businesses that benefit from the excessive use of economics and, therefore, reward commentary that advocates it. The proposition therefore appears to be reasonably plausible.
Isis Durrmeyer (U Mannheim) offers Non-linear competitive pricing: evidence from the automobile market.
ABSTRACT: We develop a new empirical model of market equilibrium with second-degree price discrimination and oligopolistic competition based on an extension of Rochet & Stole (2002) non-linear pricing theory to multiproduct firms. The demand system is semi-parametrically identified. We estimate the model using French automobile data and take advantage of observing prices and market shares at the car model version level. We test the existence of second-degree price discrimination under imperfect competition. We extend the structural analysis of nonlinear pricing to an oligopolistic setting (see Luo, Perrigne & Vuong). Our demand estimate is semi-parametric and does not rely on the exogeneity of characteristics assumptions and on instruments.
Chryssoula Pentheroudakis and Justus Baron, Northwestern University - Searle Center for Law, Regulation and Economic Growth; Mines ParisTech, PSL - Cerna examine Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases.
ABSTRACT: The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard-essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities.
Takeshi Ebina, Shinshu University - Institute of Social Sciences and Daisuke Shimizu, Faculty of Economics, Gakushuin University discuss Sequential Mergers and Competition Policy under Partial Privatization.
ABSTRACT: This study assesses the conditions under which sequential mergers can emerge in a partially privatized oligopoly with differentiated goods. In particular, it examines:
(i) the optimal merger strategies by potential merging firms,
(ii) optimal merger policy, and
(iii) privatization policy of policymakers.
First, under the subgame perfect Nash equilibrium, sequential mergers either completely emerge or do not emerge at all. The parameter range that leads to complete sequential mergers becomes larger as the market is more privatized. Second, policymakers can halt privatization, diminishing the private incentive for further sequential mergers and thus leading to higher welfare. Furthermore, given that some mergers have already taken place, further mergers may actually improve welfare. These welfare-improving mergers may not be privately profitable, however, implying that there may be room for merger-friendly policies. Third, policymakers are better off partially privatizing the public firm unless the goods are perfect substitutes or independent. Our results are applicable to the Japanese life insurance industry and the partial privatization of Japan Posting Insurance.
Friday, March 3, 2017
Stefan Frübing, Centre for European Economic Research (ZEW) and Andreas Polk, Berlin School of Economics and Law explain Product Differentiation, Leniency Programs and Cartel Stability.
ABSTRACT: Competition authorities usually consider the introduction of leniency programs as a success story. The increased incentives to report on fellow cartelists due to the introduction of leniency is likely to have contributed substantially to the clear increase in the number of detected cartels. Critics argue that leniency programs primarily target weaker cartels, whereas the most profitable cartels stay undetected and may even benefit from a shift in the authority’s resources from active cartel screening to the handling of allegedly less important leniency applications. We show that this perception cannot be upheld in a numerical Bertrand competition model with heterogeneous products. In our approach, more profitable cartels consisting of producers of closer substitutes tend to be less stable. Thus leniency programs do in fact threaten more harmful cartels.
Pablo Ibáñez Colomo, LSE has a paper on AG Wahl in Intel, or The Value of Realism and Consistency in The Context of Article 102 TFEU.
ABSTRACT: One of the important aspects of AG Wahl's Opinion in Intel is the emphasis it places on the value of realism and consistency in law-making. Legal certainty cannot be meaningfully achieved if these two factors are ignored. The Opinion explains that the presumption of unlawfulness of exclusive dealing and loyalty rebates is somewhat at odds with legal and business realities. As a result, there is a certain mismatch between what the Court says and does. AG Wahl also stresses the need to ensure that like practices are treated alike, both in the context of rebates and across Article 102 TFEU practices. In this regard, he sketches a unifying analytical framework.
Russell Pittman, DOJ has written Three Economist’s Tools for Antitrust Analysis.
ABSTRACT: The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past forty years. In younger and developing market economies, competition law itself has a history of twenty to twenty-five years at most – sometimes much less – and economic tools that have proven useful to competition law enforcement in developed market economies in focusing investigations and in assisting decision makers in distinguishing central from secondary issues are inevitably less well understood. This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic.
Thursday, March 2, 2017
Duty to State Reasons and Competition Investigation Information Request Decisions: the ‘Cement Judgments’ in Cases C-247/14 P, C-248/14 P, C-267/14 P and C-268/14 P
Katri Havu, University of Helsinki describes Duty to State Reasons and Competition Investigation Information Request Decisions: the ‘Cement Judgments’ in Cases C-247/14 P, C-248/14 P, C-267/14 P and C-268/14 P.
Abstract: The Court of Justice of the EU has set aside a group of General Court judgments and annulled a set of information request decisions by the European Commission. The requests for information, adopted in the form of decisions in the context of a competition infringement investigation, were comprehensive but accompanied by notably vague and concise statements of reasons. The Court of Justice of the EU has found that the General Court erred in law when finding the information request decisions adequately reasoned. The judgments entail important clarifications of the duty to state reasons in the specific context of competition investigations.
Fred Jenny, ESSEC explores The Institutional Design of Competition Authorities: Debates and Trends.
ABSTRACT: The issue of institutional design of competition authorities has attracted increasing interest since the early 2000 but requires further elaboration. This article attempts to fill some gaps by providing a general framework to examine a number of dimensions of this issue under three headings: the goals, the functions and the organization of competition authorities. While there is no unique institutional design which would fit all countries, a number trade-offs should be considered in designing a competition authority. These trade-offs may lead to different designs across countries depending on the local conditions. Ultimately choosing the best possible design for the competition authority given the local conditions is crucial to ensure that the competition authority is most effectively able to discharge its duties.
Daniel Garcia-Macia, Stanford University - Department of Economics, Chang-Tai Hsieh, University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER), and Peter J. Klenow, Stanford University - Department of Economics; National Bureau of Economic Research (NBER) 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.
Georgi Burlakov explains Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation.
ABSTRACT: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.
Wednesday, March 1, 2017
Martin Goetz addresses Competition and bank stability.
ABSTRACT: Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
On the Use of Price-Cost Tests in Loyalty Discounts and Exclusive Dealing Arrangements: Which Implications from Economic Theory?
Chiara Fumagalli and Massimo Motta have written On the Use of Price-Cost Tests in Loyalty Discounts and Exclusive Dealing Arrangements: Which Implications from Economic Theory?
ABSTRACT: Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.
Paul Belleflamme, CORE and Louvain School of Management, UCL (Universite Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute) and Martin Peitz, University of Mannheim - Department of Economics have a handbook chapter on Platforms and Network Effects.
ABSTRACT: In many markets, user benefits depend on participation and usage decisions of other users giving rise to network effects. Intermediaries manage these network effects and thus act as platforms that bring users together. This paper reviews key findings from the literature on network effects and two-sided platforms. It lays out the basic models of monopoly platforms and platform competition, and elaborates on some routes taken by recent research.