Antitrust & Competition Policy Blog

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

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Monday, May 11, 2015

Assessing bank competition for consumer loans

Wilko Bolt and David Humphrey are Assessing bank competition for consumer loans.

ABSTRACT: We assess the competitiveness of the $400 billion dollar U.S. bank consumer loan market by comparing results from different competition measures-HHI, Lerner Index, H-Statistic along with three others, two of which are related to frontier analysis. These measures are typically weakly related to one another and only half of them identify banks with the highest loan price and spread as also being the least competitive. This is the opposite of what would be expected. The states where the most and least competitive banks are located are noted. The most populous states with the largest banks are underrepresented.

May 11, 2015 | Permalink | Comments (0) | TrackBack (0)

Market Structure in Transition: Entry and Competition in Slovakia

Martin Labaj (University of Economics in Bratislava, Faculty of National Economy, Department of Economic Policy),  Karol Morvay,  Peter Silanie and Christoph Weiss study Market Structure in Transition: Entry and Competition in Slovakia.

ABSTRACT: The present paper provides first empirical evidence on the relationship between market size and the number of firms for a transition economy. We estimate size thresholds required to support different numbers of firms for seven retail and professional service industries in a large number of distinct geographic markets in Slovakia. The empirical analysis is carried out for three time periods (1995, 2001 and 2010) characterizing different stages of the transition process. Our results suggest that the relationship between market size and the number of firm has changed substantially over time. While entry threshold ratios tend to be larger than one and decline with the number of firms in most professions in 1995, the estimation result! s obtained for 2010 suggest entry threshold ratios much closer to one. This finding is consistent with observations suggesting a significant decline in entry barriers as well as an intensification of competition over time.

May 11, 2015 | Permalink | Comments (0) | TrackBack (0)

Friday, May 8, 2015

A primer on damages of cartel suppliers: Determinants, standing US vs. EU and econometric estimation

Eckart Bueren and Florian Smuda offer A primer on damages of cartel suppliers: Determinants, standing US vs. EU and econometric estimation.

ABSTRACT: While private actions for damages against price-cartels by direct and indirect customers receive much attention, it is largely unresolved to what extent other groups that are negatively affected may claim compensation. This paper focuses on probably the most important one: suppliers to a downstream sellers' cartel. The paper shows graphically and analytically that cartel suppliers are negatively affected by the conspiracy depending on three effects: a direct quantity, a price and a cost effect. The article then examines whether suppliers are entitled to claim ensuing losses as damages in the US and the EU, with exemplary looks at England and Germany, thereby delineating the boundaries of the right to damages in different legal systems. We find that, while the majority view in the US denies standing, the emerging position in the EU, considering also recent case law and the forthcoming Damages Directive, allows for approving cartel supplier damage claims. We argue that this can indeed be justified in view of the different institutional context and the goals assigned to the right to damages in the EU. The Annex complements our result that supplier damage claims are practically viable by showing how supplier damages can be estimated econometrically with an adjusted residual demand model.

May 8, 2015 | Permalink | Comments (0) | TrackBack (0)

Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates

Philip DeCicca and Donald S. Kenkel are Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates.

ABSTRACT: Econometric estimates of the responsiveness of health-related consumer demand to higher prices are often key ingredients for policy analysis. Drawing on several examples, especially that of cigarette demand, we review the potential advantages and challenges of synthesizing econometric evidence on the price-responsiveness of consumer demand. We argue that the overarching goal of research synthesis in this context is to provide policy-relevant evidence for broad brush conclusions and propose three main criteria to select among research synthesis methods. We also contribute a new empirical exercise that puts the results of previous research synthesis to the test. In particular, we ask whether the “best” consensus estimates of the price-elasticity of smoking help predict trends in smoking from 1995 to 2010. The demographics of the smoking population in our baseline year predict a downward trend in smoking even if cigarette prices remained constant. Average cigarette prices, however, more than doubled in real terms by 2010. We find that the observed declines in smoking over this period are considerably smaller than smoking demographics combined with prior consensus elasticity estimates would predict. Our results suggest that these consensus estimates may have systematically overestimated the price responsiveness of cigarette demand.

May 8, 2015 | Permalink | Comments (0) | TrackBack (0)

The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio

Lydia Cheung (Department of Economics, Faculty of Business and Law, Auckland University of Technology) investigates The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio.

ABSTRACT: The diversion ratio is a key ingredient to the calculation of the Upward Pricing Pressure (UPP) test, which is a new shortcut for screening mergers. It measures the degree of substitutability between the merging goods, which affects the potential for price increase post-merger. There is currently little existing research on how the diversion ratio is to be estimated (unlike its cousin, the cross-price elasticity). This paper explores one of the methods to estimate diversion ratios, which is through the estimation of a demand system. Specifically, this paper shows that the estimated value of the diversion ratio is, in fact, little affected by one of the most contentious decisions in merger analysis: the definition of the market boundary.

May 8, 2015 | Permalink | Comments (0) | TrackBack (0)

Thursday, May 7, 2015

Nonlinear Pricing with Finite Information

Dirk Bergemann (Cowles Foundation, Yale University),  Ji Shen (Dept. of Finance, London School of Economics), Yun Xu (Dept. of Electrical Engineering, Yale University), and Edmund M. Yeh (Dept. of Computer Science and Electrical Engineering, Northeastern University) examine Nonlinear Pricing with Finite Information.

ABSTRACT: We analyze nonlinear pricing with finite information. A seller offers a menu to a continuum of buyers with a continuum of possible valuations. The menu is limited to offering a finite number of choices representing a finite communication capacity between buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, either for the socially efficient or for the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized" optimally. We show that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1 = n^2. We extend our model to a multi-product environment where each buyer has preferences over a d dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. By using repeated scalar quantization, we show that the losses resulting from using the d-dimensional n-class menu converge to zero at a rate proportional to d = n^{2/d}. We introduce vector quantization and establish that the losses due to finite menus are significantly reduced by offering optimally chosen bundles.

May 7, 2015 | Permalink | Comments (0) | TrackBack (0)

Mobile Money: The Effect of Service Quality and Competition on Demand

Karthik Balasubramanian (Harvard Business School ) and David F. Drake (Harvard Business School, Technology and Operations Management Unit ) analyze Mobile Money: The Effect of Service Quality and Competition on Demand.

ABSTRACT: The use of electronic money transfer through cellular networks ("mobile money") is rapidly increasing in the developing world. The resulting electronic currency ecosystem could improve the lives of the estimated 2 billion people who live on less than $2 a day by facilitating more secure, accessible, and reliable ways to store and transfer money than are currently available. The development of this ecosystem requires a network of agents to conduct cash-for-electronic value transactions and vice versa. This paper estimates the effect of competition and service quality on mobile money demand. In this setting, service quality consists of service reliability (lower stockout and system downtime rates), pricing transparency, and agent expertise. Among our results, we find that agents experience reduced demand for service failures due to stockouts, but not for service failures due to network downtime, suggesting that consumers differentially ascribe responsibility for service failure based on the type of failure they experience. We find that both stockout rate and agent expertise are important competitive dimensions in this setting. Pricing transparency, on the other hand, has a main effect on demand but has no significant interaction with competitive intensity. This paper furthers our understanding of the impact and interaction of quality and competition in service settings, while developing a foundation for the exploration of mobile money by OM scholars.

May 7, 2015 | Permalink | Comments (0) | TrackBack (0)

Agricultural Production Restrictions and Market Power: An Antitrust Analysis

Yuliya Bolotova, School of Agricultural, Forest and Environmental Sciences College of Agriculture, Forestry and Life Sciences Clemson University provides Agricultural Production Restrictions and Market Power: An Antitrust Analysis.

ABSTRACT: During the recent decade the organizations of agricultural producers in the national dairy, potato, egg and mushroom industries implemented various pre-production and production restriction practices with the primary objective of agricultural output price stabilization. The buyers of the affected agricultural commodities have challenged the legal status of production restrictions in a number of recent and current antitrust lawsuits, arguing that the Capper-Volstead Act, a limited antitrust exemption, does not protect production restrictions. Using the theory of oligopoly, this research evaluates potential market effects of agricultural production restrictions by comparing the organizations of agricultural producers with classic illegal cartels, which harmful effects antitrust law aims to prevent. The available empirical evidence on the market and price effects of agricultural output control practices is discussed in ! light of the theoretical analysis.

May 7, 2015 | Permalink | Comments (0) | TrackBack (0)

On the Sustainability of Product Market Collusion Under Credit Market Imperfection

Sugata Marjit, RBI professor of Industrial Economics, Centre for Studies in Social Sciences, Calcutta, Arijit Mukherjee, Professor, Nottingham University Business School, and Lei Yang, Assistant Professor, Hong Long Polytechnic University provide thoughts On the Sustainability of Product Market Collusion Under Credit Market Imperfection.

ABSTRACT: We study the implication of credit constraints for the sustainability of product market collusion in a bank financed Cournot duopoly when firms face an imperfect credit market. We consider two situations without or with credit rationing. When there is no credit rationing moderately higher cost of external finance may affect the degree of collusion, but a substantial increase keeps it unaffected. Permanent adverse demand shock in this set up does not affect the possibility of collusion, but may aggravate the finance constraint and eventually lead to collusion. We also discuss the case with credit rationing.

May 7, 2015 | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 6, 2015

Preserving Competition: The Only Solution, Evolve

David Gelfand, DOJ gave a speech on Preserving Competition: The Only Solution, Evolve.

May 6, 2015 | Permalink | Comments (0) | TrackBack (0)

Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers

Isabel Teichmann and Vanessa von Schlippenbach discuss Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers.

ABSTRACT: A manufacturer contracting secretly with several downstream competitors faces an opportunism problem, preventing it from exerting its market power. In an infinitely repeated game, the opportunism problem can be relaxed. We show that the upstream firm's market power can be restored even further if the upstream firm chooses a mixed distribution system in which it makes use of an intermediary to distribute the good to a subset of the retailers and delivers directly only to the remaining downstream firms.

May 6, 2015 | Permalink | Comments (0) | TrackBack (0)

Variety and the cost of search in supermarket retailing

Timothy J. Richards, ASU, Koichi Yonezawa, ASU, and Stephen F. Hamilton, California Politechnic explore Variety and the cost of search in supermarket retailing.

ABSTRACT: Prices for similar products often differ between retail outlets, leading consumers to actively search for products that meet their needs at the lowest possible price. Search costs have essential implications for retail pricing behavior, because it is generally not optimal for consumers to become perfectly informed about all prices and all available products in a multi-product retail environment when search is costly. We examine the link between search costs and product variety offered by multi-product retailers. When consumers are faced with a large number of goods on each shopping occasion, this raises the number of prices consumers need to compare across retailers, which can raise search costs. Yet, the net benefi…ts of search can rise within a category when retailers offer wider product assortments, because packing products more densely in an attribute space allows consumers to more easily …find a product that matches their desired specifi…cations, hampering price comparison across retailers. In this study, we develop an empirical method designed to test how search costs change with product variety in a multi-product retail setting. We consider a hierarchical process in which consumers search among stores and then among brands and compare the model …t to a model in which consumers search only among brands. We fi…nd statistically signifi…cant search costs exist both for search among stores and for search among brands within a store. We also fi…nd that search costs rise in variety, a …finding that suggests both store and brand consideration sets are limited in size.

May 6, 2015 | Permalink | Comments (0) | TrackBack (0)

A new perspective on the innovator’s dilemma

Berglund, Henrik (Chalmers University of Technology ) and Sandstrom, Christian (The Rato institute ) offer A new perspective on the innovator’s dilemma.

ABSTRACT: Abstract: Why do entrant firms sometimes gain the upper hand under conditions of discontinuous technological change? Previous research on this topic has either looked at the role of established competencies and/or firm incentives to invest in a new technology. In this paper we explore an alternative explanation. Drawing upon evidence from the ongoing transition from CCTV to digital, IP based video surveillance, we argue that entrant firms may be more prone to act entrepreneurially, i.e. more inclined to proactively create or transform markets and build ecosystems. As new technologies frequently require altered behaviour among customers and stakeholders, this capability is sometimes critical in order to succeed in a technological transition. Our contribution therefore lies in pointing out that not only may incentives to allocate R&D resources differ among entrants and incumbents, firms might also have different incentives to engage in entrepreneurial activities of creating or transforming markets.

May 6, 2015 | Permalink | Comments (0) | TrackBack (0)

Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection

Aniol Llorente-Saguer (School of Economics and Finance, Queen Mary, University of London ) and Ro'i Zultan (Department of Economics, Ben-Gurion University ) have a paper on Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection.

ABSTRACT: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behavior in firstprice (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiations often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency and eliminating the revenue dominance typically observed in first-price auctions.

May 6, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 5, 2015

A Note on Endogenous Heterogeneity in a Duopoly

X. Henry Wang (Department of Economics, University of Missouri-Columbia ) and Chenhang Zeng (Research Center for Games and Economic Behavior, Shandong University ) provide A Note on Endogenous Heterogeneity in a Duopoly.

ABSTRACT: This note extends the simultaneous-move endogenous technology choice model of Mills and Smith (1996) in two directions. First, expanding consideration to when the technology set is sufficiently convex, we find that the likelihood for asymmetric equilibrium in technology choice does not expand under simultaneous moves. Second, introducing sequential moves in the technology choice stage, we find that (i) if the technology set is insufficiently convex then the same amount of asymmetry is obtained as under simultaneous moves, (ii) if the technology set is sufficiently convex then sequential moves lead to more asymmetric technology choices, and (iii) the first mover always chooses a more efficient technology in any asymmetric equilibrium.

May 5, 2015 | Permalink | Comments (0) | TrackBack (0)

Equilibrium Price Dispersion Across and Within Stores

Guido Menzio (Department of Economics, University of Pennsylvania) and Nicholas Trachter (Federal Reserve Bank of Richmond) discuss Equilibrium Price Dispersion Across and Within Stores.

ABSTRACT: We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at inconvenient times induces causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers.

May 5, 2015 | Permalink | Comments (0) | TrackBack (0)

Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive

Jason Pearcy (Montana State University ) explores Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive.

ABSTRACT: In markets where consumers have switching costs and firms cannot price discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock-in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Competition takes place over an infinite horizon with any number of firms. This paper shows that the relationship between the level of switching costs and the number of firms determines whether firms offer low or high prices. Similar to previous duopoly studies, switching costs are likely to facilitate higher equilibrium prices only when there is a small number of firms and switching costs are large. Unlike previous studies this paper demonstrates that with a sufficiently large number of firms, switching costs have the opposite effect and prices are lower with switching costs when compared to equilibrium prices without switching costs. The equilibrium of the model also contains realistic features uncommon to other models in the literature where some consumers switch in equilibrium and a symmetric pure strategy price exists with more than two firms.

May 5, 2015 | Permalink | Comments (0) | TrackBack (0)

Economic Analysis of the Impact of the Comcast/Time Warner Cable Transaction on Internet Access to Online Video Distributors

David S. Evans, University of Chicago Law School; University College London; Global Economics Group provides Economic Analysis of the Impact of the Comcast/Time Warner Cable Transaction on Internet Access to Online Video Distributors.

ABSTRACT: This paper is one of the major economic studies I submitted to the FCC in opposition to the proposed merger of Comcast and Time Warner Cable. After reviewing and rebutting some of the economic theories and evidence put forth by Comcast in support of the merger the paper presents an antitrust analysis that shows that the merger would have significant horizontal and vertical effects that would harm the public.

May 5, 2015 | Permalink | Comments (0) | TrackBack (0)

Have Indonesian Rubber Processors Formed a Cartel?

Thomas Kopp, Georg August Universitat Gottingen, Zulkifli Alamsyah, Jambi University, Raja Sharah Fatricia, Jambi University and Bernhard Brummer, Georg August Universitat Gottingen ask Have Indonesian Rubber Processors Formed a Cartel? Analysis of Intertemporal Marketing Margin Manipulation.

ABSTRACT: A high level of market-power within the rubber processing industry limits the spread of the wealth generated with exports in Indonesia’s Jambi province. The market-power of the crumb rubber factories is based on a high level of concentration. With an Auto-Regressive Asymmetric Threshold Error Correction Model, we study the price transmission at these factories. The extent of the threshold effect is studied, as well as the rents that are redistributed from the farmers to the factories. This is the first paper to quantify the additional distributional consequences of intertemporal marketing margin manipulation based on cartelistic or oligopsonistic market power.

May 5, 2015 | Permalink | Comments (1) | TrackBack (0)

Monday, May 4, 2015

Competition and Innovation: Did Monsanto’s Entry Encourage Innovation in GMO Crops?

Petra Moser, Stanford University - Department of Economics; National Bureau of Economic Research (NBER) and Paul Wong, Stanford University - Department of Economics asks Competition and Innovation: Did Monsanto’s Entry Encourage Innovation in GMO Crops?

ABSTRACT: In 1996, the chemical firm Monsanto bought a plant breeder that had developed a new corn hybrid, which could withstand Monsanto’s powerful herbicide Roundup.  Due to the pre-existing structure of the US plant-breeding industry, this acquisition and Monsanto’s acquisition of five other corn breeders meant that Monsanto had also entered soy breeding, in addition to corn.  As a result, the market structure of the soy industry shifted from a quasi monopoly (by Pioneer Hi-Bred) to a duopoly with a competitive fringe. At the same time, Monsanto’s acquisitions created no significant change in the market structure for other crops, such as wheat or cotton.  New data on field trials enable us to investigate the effects of these changes on innovation.  These data indicate that Pioneer innovated less in response to Monsanto’s entry.  Field trial data also show that the competitive fringe innovated less after Monsanto entered.  Data on patent applications, however, indicate that Pioneer and the competitive fringe patented more, after Monsanto entered.

May 4, 2015 | Permalink | Comments (0) | TrackBack (0)