Wednesday, August 13, 2014
Etienne Gagnon (Board of Governors of the Federal Reserve System (U.S.)) and J. David Lopez-Salido (Board of Governors of the Federal Reserve System (U.S.)) analyze Small Price Responses to Large Demand Shocks.
ABSTRACT: We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.
Abdessalem Abbassi, University of Carthage, Ahlem Dakhlaoui, Polytechnic School of Tunisia and Lota D.Tamini, Universite Laval analyze Risk Aversion and Dynamic Games Between Hydroelectric Operators under Uncertainty.
ABSTRACT: This article analyses management of hydropower dams within monopolistic and oligopolistic competition and when hydroelectricity producers are risk averse and face demand uncertainty. In each type of market structure we analytically determine the water release path in closed-loop equilibrium. We show how a monopoly can manage its hydropower dams by additional pumping or storage depending on the relative abundance of water between different regions to smooth the effect of uncertainty on electricity prices. In the oligopolistic case with symmetric risk aversion coefficient, we determine the conditions under which the relative scarcity (abundance) of water in the dam of a hydroelectric operator can favor additional strategic pumping (storage) in its competitor’s dams. When there is asymmetry of the risk aversion coefficient, the firm’s hydroelectricity production increases as its competitor’s risk aversion increases, if and only if the average recharge speed of the competitor’s dam exceeds a certain threshold, which is an increasing function of its average water inflows.
Michael Volkov has a great blog post on Four Ways to Improve Antitrust Compliance Programs.
My own thoughts (along with those of co-author Anne Riley) on the same subject are in our paper Rethinking Compliance.
Olivier Bonroy (Universite Pierre-Mendes-France - Grenoble II), Stephane Lemarie (Universite Pierre-Mendes-France - Grenoble II), Jean-Philippe Tropeano (Paris School of Economics) discuss Credence goods, experts and risk aversion.
ABSTRACT: The existing literature on credence goods and expert services has overlooked the importance of risk aversion. In this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk-averse consumers. Our results show that the presence of risk aversion reduces the expert's incentive to invest in diagnosis and may thus lead to consumers' mistreatment.
Marie-Laure Allain (Ecole Nationale Polytechnique), Claire Chambolle (Alimentation et Sciences Sociales), Stephane Turolla (Structures et Marches Agricoles, Ressources et Territoires, INRA), and Sofia Villas-Boas (ARE, University of California, Berkeley) provide The impact of retail mergers on food prices: evidence from France.
ABSTRACT: Using consumer panel data, we analyze the impact of a merger in the retail sector on food prices in France. In order to capture the local dimension of retail competition, we define local markets as catchment areas around each store. We develop a difference-in-differences analysis to compare price changes in local markets where the merger did modify the ownership structure (treated group) to price changes in local markets where the merger did not affect the ownership structure (control group). We find that prices of competing firms in areas where the merger occurred (treated group) increased significantly relative to the control areas where existing firms were not affected by a merger. In fact, our findings suggest that the merger significantly raised the competitors' prices. These results are consistent with a combination of local concentration and a decrease in differentiation.
Tuesday, August 12, 2014
Nestor Duch-Brown (European Commission – JRC - IPTS) and Bertin Martens (European Commission – JRC - IPTS) write on Consumer benefits from the EU Digital Single Market: evidence from household appliances markets.
ABSTRACT: This paper investigates price differences between online and offline retail channels in the EU Digital Single Market. Using price and sales data for ten different product categories sold both offline and online in 21 EU countries in 2009, and correcting for product characteristics, we find evidence that confirms the theory: online prices are lower than offline prices, price dispersion also tends to be lower online and online demand is more price-elastic than offline demand. In addition, from our demand estimates we compute the consumers' welfare effects of different scenarios. Our results indicate that a full price convergence across EU member states towards the lowest observed average price would significantly benefit consumers. Moreover, eliminating e-commerce would reduce consumer surplus in €34 billion while an increase in online sales between 10% and 25% would represent a change in consumer welfare in the range of! €3.4 billion to €13 billion.
The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets
Tim Burnett, University of Bristol analyzes The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets.
ABSTRACT: This paper empirically analyses the impact of the bundling of four common home communication services with a single supplier on the probability that an individual changes supplier using a survey-elicited dataset of 2,871 individuals. Implementing a random effects probit approach to control for individual heterogeneity, the results strongly show that when individuals bundle their service then they are significantly less likely to change supplier. A second result indicates that service- and supplier- related variables are better predictors of an individual's likelihood of switching than are the characteristics of the individual, suggesting that future research in this area should prioritise their inclusion.
Salvatore Piccolo (Universita Cattolica del Sacro Cuore di Milano and CSEF) and Giancarlo Spagnolo (SITE Stockholm School of Economics, DEF Tor Vergata, and CEPR) have an interesting paper on Debt, Managers and Cartels. Recommended!
ABSTRACT: We propose a theory of anticompetitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms ability to sustain collusive agreements. Shareholders' commitments not to expropriate debtholders through managers with valuable reputations or common incentive schemes greatly facilitate collusive behavior in product markets. Disclosure rules aimed at improving transparency in corporate governance or network-based credit markets can confer credibility to such arrangements even in environments where firms lack commitment power, thereby inducing collusion through leverage in otherwise competitive downstream industries. Managers are happy with the arrangement since they share in the collusive rent.
Germain Gaudin (Dusseldorf Institute for Competition Economics, Heinrich Heine University) and Alexander White (Tsinghua University) provide thoughts On the antitrust economics of the electronic books industry.
ABSTRACT: We show that the rise in ebook prices following Apple's entry into the market can be explained by Amazon's Kindle device losing its essential position. When consumers began accessing Amazon's ebooks using third-party devices, such as the iPad, Amazon's incentive to keep ebook prices low diminished. This explanation contrasts with a recent U.S. court decision claiming that price increases stem from a switch in the form of contracts used by ebook publishers and retailers. We show that, if contracts revert to their prior form, as stipulated by the court decision, this will likely push ebook prices up even further.
Monday, August 11, 2014
Lisa Bruttel, University of Konstanz, discusses The Effects of Non-binding Retail-price Recommendations on Consumer and Retailer Behavior.
ABSTRACT: This paper presents results from an experiment on the effects of retail-price recommendations (RPRs) on consumer and retailer behavior. Despite their non-binding nature, RPRs may influence consumers willingness to pay by setting a reference point. Loss averse consumers will then be reluctant to pay a price higher than the recommended one. Furthermore, at a given price level consumers will demand a larger quantity the higher the RPR is. We find evidence for both effects. They are stronger when the price recommendation contains information about the value of the product to the consumer instead of providing an uncorrelated anchor only. Retailers in this study react to RPRs in a similar way as consumers do, but they do not anticipate consumers behavior well.
Lisa Bruttel, University of Konstanz asks Buyer power in large buyer groups?
ABSTRACT: This paper studies the exertion of market power in large buyer groups confronting an incumbent monopolist and a potential market entrant in a repeated trade situation. In the experiment, buyer power can either occur as demand withholding when only the incumbent is present in the market, or it can take the form of buying at higher prices from the entrant in order to foster future re-entry. Comparing markets with groups of two and eight buyers, we find that both forms are prevalent irrespective of the number of buyers. However, a control treatment shows that seemingly strategic behavior is better explained by inequality aversion of the buyers towards the two different sellers.
Ioannis Pinopoulos (Department of Economics, University of Macedonia) addresses Equilibrium Downstream Mark-up and Upstream Free Entry. Kudos also for the shortest abstract I have ever seen.
ABSTRACT: In a successive Cournot oligopoly with upstream free entry, we show that the equilibrium downstream mark-up may increase with the number of downstream firms.
Sunday, August 10, 2014
94% of Academic Economists Admit to Unacceptable Research Practices, Including Sex for Co-authorship and Promotion
The Inside Higher Ed article Sex, Lies, Economists reports on results from an anonymous survey of 400 members of the European Economics Association that is forthcoming in the article Scientific Misbehavior in Economics. Among the findings is that some people have sex for co-authorship (a small percentage and therefore not that interesting a finding but certainly the most salacious one). For the record, I have never had sex with any of my economist co-authors or any other co-authors.
Most of the research practices that the article finds problematic focus on strategic gaming of the peer review process. To the strategic gaming of peer review concern, I have one simple point based on my peer review experiences - the moment before you have a revise and resubmit, the paper is yours. After that moment, the editors and outside reviewers own your paper.
Saturday, August 9, 2014
The Appropriate Legal Standard and Sufficient Economic Evidence for Exclusive Dealing Under Section 2: The FTC's McWane Case
Steven C. Salop, Georgetown University Law Center, Sharis A. Pozen, Skadden, Arps, Slate, Meagher & Flom LLP, and John R. Seward, Skadden, Arps, Slate, Meagher & Flom LLP offer The Appropriate Legal Standard and Sufficient Economic Evidence for Exclusive Dealing Under Section 2: The FTC's McWane Case.
ABSTRACT: The FTC recently found McWane, Inc. liable for unlawful monopoly maintenance by a 3-1 majority. The dispute among the FTC Commissioners raises important and interesting issues regarding the law and economics of exclusive dealing and the proper evaluation of the competitive effects of exclusionary conduct. Commissioner Wright’s Dissent proposes and utilizes a new legal standard that requires the plaintiff to show “clear evidence” of harm to competition before shifting the burden to the defendant to show procompetitive efficiency benefits. This burden of proof and production on the plaintiff is much higher than showing “probable effect” based on a preponderance of the evidence standard. Application of this higher burden to interbrand exclusivity restraints by monopolists is not supported either by the case law, economic theory or empirical evidence. In evaluating harm to competition, this legal standard places no weight on certain important factors, including the fact that McWane was a monopolist with the explicit purpose of raising the costs and reducing the distribution of its only competitors. His proposed standard also does not consider whether McWane’s efficiency claims were valid, in the absence of other clear evidence of competitive harm. Commissioner Wright limits his economic analysis to only a single possible mechanism of exclusionary effect, whether the entrant was prevented from reaching minimum efficient scale of production, rather than a broader analysis of whether the entrant’s costs were raised or whether its ability to expand output was so limited by the exclusives that it was unable to prevent the maintenance of McWane’s monopoly pricing. Commissioner Wright also fails to credit the direct evidence of price effects found by the Commission. In our view, this proposed type of legal standard and economic approach is not an “enquiry meet for the case.” It creates a serious risk of leading to false negatives, under-enforcement and under-deterrence.
Friday, August 8, 2014
Nick Vikander (Department of Economics, Copenhagen University) describes Sellouts, Beliefs, and Bandwagon Behavior.
ABSTRACT: This paper examines how a firm can strategically use sellouts to influence beliefs about its good's popularity. A monopolist faces a market of conformist consumers, whose willingness to pay is increasing in their beliefs about aggregate demand. Consumers are broadly rational but have limited strategic reasoning about the firm's incentives. I show that in a dynamic setting, the firm can use current sellouts to mislead consumers about future demand and increase future profits. Sellouts tend to occur when demand is low, they are accompanied by introductory pricing, and certain consumers benefit from others being misled.
Juan I. Beccuti, Universitat Bern has written on Optimal Selling Mechanisms under Imperfect Commitment: Extending to the Multi-Period Case.
ABSTRACT: This paper studies the optimal mechanism for a seller (she) that sells, in a sequence of periods, an indivisible object per period to the same buyer (he). Buyer's willingness to pay remains constant along time and is his private information. The seller can commit to the current period mechanism but not to future ones. Our main result is that a seller cannot do better than posting a price in every period. We give a complete characterization of the optimal mechanism and equilibrium payoffs for every prior. Also, we show that, when agents are arbitrarily patient, the seller does not learn about buyer's type except in extreme cases, posting a price equal to the minimum buyer's willingness to pay in every period. This result is a reminiscence of the Coase's conjecture, where a monopolist cannot exert her monopoly power due to the lack of long-term commitment.
Dragan Jovanovic (Goethe Univesity Frankfurt) analyzes Mergers, managerial incentives, and efficiencies.
ABSTRACT: We analyze the effects of synergies from horizontal mergers in a Cournot oligopoly where principals provide their agents with incentives to cut marginal costs prior to choosing output. We stress that synergies come at a cost which possibly leads to a countervailing incentive effect: The merged firm's principal may be induced to stifle managerial incentives in order to reduce her agency costs. Whenever this incentive effect dominates the well-known direct synergy effect, synergies actually reduce consumer surplus which opposes the use of an efficiency defense in merger control.
Thursday, August 7, 2014
The Pacific Legal Foundation's blog has on its blog its brief and some blog posts in the N.C. Dental Examiners case.
Krystyna Kowalik-Banczyk, Technical University of Gdansk asks Reforms of Polish Antitrust Law: Closer to, of Farther From, the European Model?
ABSTRACT: The Polish Act on the Protection of Competition and Consumers has been recently amended. Changes include the introduction of a two-phase-based merger control, a more efficient leniency program, and the administrative liability of individuals involved in antitrust agreements.
IS THERE A MARKET FOR ORGANIC SEARCH ENGINE RESULTS AND CAN THEIR MANIPULATION GIVE RISE TO ANTITRUST LIABILITY?
James D. Ratliff (Compass Lexecon) and Daniel L. Rubinfeld (Berkeley and NYU) ask IS THERE A MARKET FOR ORGANIC SEARCH ENGINE RESULTS AND CAN THEIR MANIPULATION GIVE RISE TO ANTITRUST LIABILITY?
ABSTRACT: Google has been accused of manipulating its organic search results to favor its own services. We explore possible choices of relevant antitrust markets that might make these various antitrust allegations meaningful. We argue that viewing Internet search in isolation ignores the two-sided nature of the search-advertising platform and the feedback effects that link the provision of organic search results to consumers on the one hand, and the sale to businesses of advertising on the other. We conclude that the relevant market in which Google competes with respect to Internet search is at least as broad as a two-sided search-advertising market. We also ask whether Google has a duty to provide organic search results that are neutral with respect to whether the displayed listing is for a Google rather than a non-Google business. We articulate and apply a standard that asks whether various practices related to Google's organic search results would harm competition that would have otherwise occurred.