Antitrust & Competition Policy Blog

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

Thursday, November 16, 2017

Quality Pricing-to-Market

Raphael Auer ; Thomas Chaney and Philip Sauré examine Quality Pricing-to-Market.

ABSTRACT: This paper analyses firm's pricing-to-market decisions in vertically differentiated industries. We first present a model featuring firms that sell goods of heterogeneous quality levels to consumers who are heterogeneous in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the unique pricing game under costly international trade. The comparative statics highlight how firms' pricing-to-market decisions are shaped by the interaction of consumer income and good quality. We derive two testable predictions. First, the relative price of high qualities compared to low qualities increases with the income of the destination market. Second, the rate of cost pass-through into consumer prices falls with quality if destination market income is sufficiently high. We present evidence in support of these two predictions based on a dataset of prices, sales, and product attributes in the European car industry.

November 16, 2017 | Permalink | Comments (0)

Assistant Attorney General Makan Delrahim Delivers Keynote Address at American Bar Association's Antitrust Fall Forum

Large Spatial Competition

Matias Nunez (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique) and Marco Scarsini (Dipartimento di Economia e Finanza - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma]) study Large Spatial Competition.

ABSTRACT: We consider spatial competition when consumers are arbitrarily distributed on a compact metric space. Retailers can choose one of finitely many locations in this space. We focus on symmetric mixed equilibria which exist for any number of retailers. We prove that the distribution of retailers tends to agree with the distribution of the consumers when the number of competitors is large enough. The results are shown to be robust to the introduction of (i) randomness in the number of retailers and (ii) different ability of the retailers to attract consumers.

November 16, 2017 | Permalink | Comments (0)

Prominence, Complexity, and Pricing

Ioana Chioveanu investigates Prominence, Complexity, and Pricing.

ABSTRACT: This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Complexity limits competing offers' comparability and results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm's average price is lower, which is consistent with confused consumers' bias.

November 16, 2017 | Permalink | Comments (0)

Consumer Stockpiling and Sales Promotions

Anna Lu studies Consumer Stockpiling and Sales Promotions.

ABSTRACT: In retailing markets of storable goods, consumer behavior is typically characterized by stockpiling. While existing research has developed rich models for such strategic consumer behavior, little is known about how sellers should ideally respond to it. In this paper, we provide insights into how frequency and depth of promotions affect consumer purchases and seller revenues in the long run. We show an application to the U.S. market for laundry detergent. We use estimates from a structural dynamic demand model to simulate different pricing policies and find that in the detergent market, an increase in promotion depth is more effective than a change in promotion length. Our results suggest that this finding can be translated to markets with a large heterogeneity in storage costs and steady consumption rates.

November 16, 2017 | Permalink | Comments (0)

Regional regulators in healthcare service under quality competition: A game theoretical model

Bisceglia, Michele ; Cellini, Roberto and Grilli, Luca offers Regional regulators in healthcare service under quality competition: A game theoretical model.

ABSTRACT: In several countries, healthcare services are provided by public and/or private subjects, and they are reimbursed by the Government, on the basis of regulated prices. Thus, providers take prices as given and compete on quality to attract patients. In some countries, regulated prices differ across regions. This paper focuses on the interdependence between regional regulators within a country: it proposes a model of spatial competition to study how price-setters of different regions interact, in a simple but realistic framework. We show that the decentralisation of price regulation implies higher expenditure, but higher patients' welfare.

November 16, 2017 | Permalink | Comments (0)

Wednesday, November 15, 2017

Regional Purchasing Groups and Hospital Medicine Prices: Evidence from Group Creations

L. Toulemon discusses Regional Purchasing Groups and Hospital Medicine Prices: Evidence from Group Creations.

ABSTRACT: This paper estimates the impact of group purchasing on medicine prices in French hospitals, taking advantage of the entry of hospitals into regional purchasing groups between 2009 and 2014. I use a new database providing the average annual prices paid for all innovative and costly medicines in public hospitals. Using a fixed effects model that controls for hospitals’ medicine-specific bargaining abilities and medicine-specific price trends, I find that group purchasing reduces prices of medicines in oligopoly markets, but has no impact on the prices of medicines with no competitors.

November 15, 2017 | Permalink | Comments (0)

Competition and prudential regulation

Fisher, Paul (PRA) and Grout, Paul (Bank of England) examine Competition and prudential regulation.

ABSTRACT: In 2014 the Prudential Regulation Authority, Bank of England, was given a new secondary objective to facilitate effective competition when it advances its primary objectives related to safety and soundness and policyholder protection. Given the concerns around conflict between competition and stability, there has been considerable interest in the new objective. After discussing the precise form of the competition objective and its background, we consider how best it should be interpreted and implemented. Amongst other points we argue that (i) secondary objectives should be seen as mechanisms for forcing, or at least encouraging, co-ordination across agencies and therefore such objectives have a significant role to play in this context, (ii) that time and proportionality are the key dimensions that provide discretion to pursue primary and secondary objectives, (iii) that there is nothing overtly special about competition as a second best tool when it comes to mitigating risk in the absence of good prudential regulation, and (iv) if prudential regulation is set at the same time that the competition objective is ‘in play’, then the conflict between stability and competition tends to disappear, although some ‘tension’ remains at the margins.

November 15, 2017 | Permalink | Comments (0)

Measuring Market Power in Professional Baseball, Basketball, Football and Hockey

Healy, Gerald T., III ; Tan, Jing Ru and Orazem, Peter are Measuring Market Power in Professional Baseball, Basketball, Football and Hockey.

ABSTRACT: Forbes Magazine estimates of annual revenues, costs and team values for professional sports teams are used to derive market power measures for teams in four major professional sports leagues: the MLB, NBA, NHL, and the NFL. Two variants of the Lerner Index, one that reflects short-term operations for the past year and another reflecting the long-run net present value of the franchise are derived over the 2006-2016 period. Only the long-run measure provides estimates that are always consistent with theoretical requirements. Analysis of variance of long-run market power shows that local market factors and past team performance have less impact on market power than common league-wide effects. Team market power depends least on local team effects in leagues that have stronger revenue sharing policies. Price-cost margins are higher for professional teams in North American than for the most valuable European soccer teams, consistent with the stronger exemption from anti-trust law in the U.S.

November 15, 2017 | Permalink | Comments (0)

Sentencing in Ireland's First Bid-Rigging Cartel Case: An Appraisal

Paul Gorecki offers Sentencing in Ireland's First Bid-Rigging Cartel Case: An Appraisal.

ABSTRACT: The paper argues that the sentences imposed on 31 May 2107 by the Central Criminal Court in the commercial flooring bid-rigging cartel case and the methodology used in setting those sentences seriously undermines the effective enforcement of competition law in Ireland. The sentence imposed on the individual responsible for initiating and participating for 2 years and 4 months in the bid-rigging cartel was only three weeks wages or €7,500. No gaol sentence was imposed. The undertaking was fined €10,000; the value of the rigged tenders it won totalled €556,000. The Court’s reasoning did not justify the low sanctions. Current sentencing norms indicate a custodial sentence and much higher fines for both the individual and the undertaking. This is consistent with the application of EU and US Sentencing Guidelines to the facts of the commercial flooring bid-rigging cartel case. If the sentences imposed by the Central Criminal Court are not successfully appealed as being unduly lenient and appropriate sentencing guidelines developed, then the prospect for competition law enforcement in Ireland is grim. In particular, the effectiveness of the Cartel Immunity Programme, a vital tool for cartel detection and prosecution, will be severely damaged.

November 15, 2017 | Permalink | Comments (0)

Fixed vs. Flexible Pricing in a Competitive Market

Selcuk, Cemil (Cardiff Business School) and Gokpinar, Bilal (UCL School of Management) explore Fixed vs. Flexible Pricing in a Competitive Market.

ABSTRACT: We study the selection and dynamics of two popular pricing policies fixed price and flexible pricing in competitive markets. Our paper extends previous work in marketing, e.g. Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible non-economic aspects of bargaining. We construct and analyze a competitive search model which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that fixed price and flexible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More specifically, if customers dislike haggling, then fixed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are offered, and the unique equilibrium exhibits full segmentation: Haggler customers avoid fixed-price firms and exclusively shop at flexible firms whereas non-haggler customers do the opposite. We also find that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario where market demand goes through periodic ups and downs and find that equilibrium prices remain mostly stable despite significant áuctuations in demand. This finding suggests a plausible competition-based explanation for the stability of prices.

November 15, 2017 | Permalink | Comments (0)

Tuesday, November 14, 2017

Robust policy schemes for R&D games with asymmetric information

Anton Bondarev and Frank C. Krysiak (University of Basel) offer Robust policy schemes for R&D games with asymmetric information.

ABSTRACT: We consider an abstract setting of the di fferential r&d game, where participating firms are allowed for strategic behavior. We assume the information asymmetry across those fi rms and the government, which seeks to support newer technologies in a socially optimal manner. We develop a general theory of robust subsidies under such one-sided uncertainty and establish results on relative optimality, duration and size of di fferent policy tools available to the government. It turns out that there might exist multiple sets of second-best robust policies, but there always exist a naturally induced ordering across such sets, implying the optimal choice of a policy exists for the government under different uncertainty levels.

November 14, 2017 | Permalink | Comments (0)

Was It All That Bad? U.S. Federal Antitrust Policy Since 1980 (GW Law School) Monday, November 20, 2017, 2:00pm - 6:00pm

Was It All That Bad? U.S. Federal Antitrust Policy Since 1980

A substantial body of modern academic and popular commentary argues that US federal antitrust policy since the 1970s failed badly by tolerating significant increases in concentration, including the emergence of dominant firms in many commercial sectors.  This critique calls for a significant redirection of policy to control mergers more severely, to attack improper exclusion by dominant enterprises, and, perhaps, to deconcentrate certain industries. 

This symposium brings together academics and practitioners who have served in leadership positions at the Department of Justice Antitrust Division and the Federal Trade Commission at various times since 1980.  The participants will assess the performance of federal enforcement policy over the past three decades and discuss possible refinements going ahead.

Participants

  • Kevin Arquit, Weil
  • William Baer, Arnold Porter Kaye Scholer
  • William Blumenthal, Sidley
  • Debbie Feinstein, Arnold Porter Kaye Scholer (TBC)
  • Andrew Gavil, Howard University
  • Renata Hesse, Sullivan & Cromwell
  • William Kovacic, The George Washington University Law School
  • Jonathan Leibowitz, Davis Polk
  • Aviv Nevo, University of Pennsylvania
  • James Rill, Baker Botts
  • Jeffrey Schmidt, Linklaters
  • Daniel Sokol, University of Florida

Agenda

1:30 pm to 2 pm: Registration

2 pm: Welcome and Introduction

2:15 to 3:45 pm: Antitrust Goals (and Is Big Bad)?

Moderator - William Kovacic

Discussants

  • Kevin Arquit
  • Bill Baer
  • Aviv Nevo
  • Jim Rill
  • Jeff Schmidt

3:45 to 4 pm: Coffee Break

4 to 5:30 pm: Do We Need to Change Statutes, Case Law, or Agency Practice for Effective Enforcement in Mergers and Conduct?

Moderator - Daniel Sokol

Discussants

  • Bill Blumenthal
  • Debbie Feinstein (TBC)
  • Andy Gavil
  • Renata Hesse
  • Jon Leibowitz

5:30 to 6 pm: Closing Remarks and Discussion

  • Daniel Sokol

Register

The event is free and open to the public. To register, please contact Kierre Hannon, The George Washington University Law School: khannon@law.gwu.edu.

When

Monday, November 20, 2017

2:00pm - 6:00pm

Where

The George Washington University Law School
2000 H Street, NW
Student Conference Center, Lisner 2nd Floor
Washington, DC 20052

November 14, 2017 | Permalink | Comments (0)

Assistant Attorney General Makan Delrahim Delivers Remarks at the USC Gould School of Law's Center for Transnational Law and Business Conference

Market Power in the Capacity Market? The Case of Ireland

J. Teirila asks Market Power in the Capacity Market? The Case of Ireland.

ABSTRACT: An electricity market coupled with a capacity market is modelled as a two-stage game that allows for strategic behaviour both in the electricity market and in the capacity market. The model is applied to the Irish electricity market, where a capacity market based on reliability options is established by the end of 2017. As Ireland has one dominant firm in the electricity market, there have been concerns that the new market design provides it an opportunity to abuse market power in these two markets. Using Ireland as an example this article examines the kinds of strategic behaviours that can be expected if a capacity market is implemented in an imperfectly competitive market. It is found that the potential for the abuse of market power in the capacity market is significant for the dominant firm in Ireland and that there is no simple way to mitigate it. The relative amount of procured capacity, the amount and characteristics of potential entrants, and the competitiveness of the electricity market are the main determinants of the possibilities and incentives for abusing market power in the capacity market.

November 14, 2017 | Permalink | Comments (0)

The Rise of Market Power and the Macroeconomic Implications

Jan De Loecker and Jan Eeckhout examine The Rise of Market Power and the Macroeconomic Implications.

ABSTRACT: We document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. There is no strong pattern across industries, though markups tend to be higher, across all sectors of the economy, in smaller firms and most of the increase is due to an increase within industry. We do see a notable change in the distribution of markups with the increase exclusively due to a sharp increase in high markup firms. We then evaluate the macroeconomic implications of an increase in average market power, which can account for a number of secular trends in the last 3 decades: 1. decrease in labor share, 2. increase in capital share, 3. decrease in low skill wages, 4. decrease in labor force participation, 5. decrease in labor flows, 6. decrease in migration rates, 7. slowdown in aggregate output.

November 14, 2017 | Permalink | Comments (0)

Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets

Kate Ho (Columbia University) and Robin Lee (Harvard University Department of Economics) have an interesting paper on Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets.

ABSTRACT: Why do insurers choose to exclude medical providers, and when would this be socially desirable? We examine network design from the perspective of a profit-maximizing insurer and a social planner to evaluate the welfare effects of narrow networks and restrictions on their use. An insurer may engage in exclusion to steer patients to less expensive providers, cream-skim enrollees, and negotiate lower reimbursement rates. Private incentives for exclusion may diverge from social incentives: in addition to the standard quality distortion arising from market power, there is a “pecuniary” distortion introduced when insurers commit to restricted networks in order to negotiate lower rates. We introduce a new bargaining solution concept for bilateral oligopoly, Nash-in-Nash with Threat of Replacement, that captures such bargaining incentives and rationalizes observed levels of exclusion. Pairing our framework with hospital and insurance demand estimates from Ho and Lee (2017), we compare social, consumer, and insurer-optimal hospital networks for the largest non-integrated HMO carrier in California across several geographic markets. We find that both an insurer and consumers prefer narrower networks than the social planner in most markets. The insurer benefits from lower negotiated reimbursement rates (up to 30% in some markets), and consumers benefit when savings are passed along in the form of lower premiums. A social planner may prefer a broader network if it encourages the utilization of more efficient insurers or providers. We predict that, on average, network regulation prohibiting exclusion has no significant effect on social surplus but increases hospital prices and premiums and lowers consumer surplus. However, there are distributional effects, and regulation may prevent harm to consumers living close to excluded hospitals.

November 14, 2017 | Permalink | Comments (0)

Consumer Learning and the Entry of Generic Pharmaceuticals

Neha Bairoliya; Pinar Karaca-Mandic; Jeffrey S. McCullough and Amil Petrin investigate Consumer Learning and the Entry of Generic Pharmaceuticals.

ABSTRACT:Generic pharmaceuticals provide low-cost access to treatment. Despite their chemical equivalence to branded products, many mechanisms may hinder generic substitution. Consumers may be unaware of their equivalence. Firms may influence consumers through advertising or product line extensions. We estimate a structural model of pharmaceutical demand where consumers learn about stochastic match qualities with specific drugs. Naïve models, without consumer heterogeneity and learning, grossly underestimate demand elasticities. Consumer bias against generics critically depends on experience. Advertising and line extensions yield modest increases in branded market shares. These effects are dominated by consumers’ initial perception bias against generics.

November 14, 2017 | Permalink | Comments (0)

Competition in cascades

Moita, Rodrigo Menon Simões and Monte, Daniel describe Competition in cascades.

ABSTRACT: Hydroelectric generation is the main source of energy production in many countries. When firms operate in the same river, or in cascades, the output of an upstream firm is the input of its downstream rival. We build a dynamic stochastic duopoly model of competition in cascades and show that the decentralized market is efficient at the critical times when rain is infrequent, but inefficient when rain is more frequent. Market power is an issue when peak prices are sufficiently higher than off-peak prices: Upstream firms delay production in off-peak times, limiting their rival downstream generators' production in peak times.

November 14, 2017 | Permalink | Comments (0)

Monday, November 13, 2017

Bundling and Insurance of Independent Risks

Benjamin Davies and Richard Watt (University of Canterbury) examine Bundling and Insurance of Independent Risks.

ABSTRACT: Risky prospects can often by disaggregated into several identifiable, smaller risks. In such cases, at least two modes of insurance are available: either (i) the disaggregated risks can be insured independently or (ii) the aggregate risk can be insured as one. We identify (ii) as risk bundling prior to insurance and (i) as separate, or unbundled, insurance. We investigate whether (i) or (ii) is preferable among consumers, insurers and the insurance market as a whole using numerical simulations. Our simulations reveal that separate contracts provide the socially optimal form of insurance when the insurer is able to charge the profit-maximising premia and has perfect information. Under asymmetric information with respect to consumers’ risk aversion, we find that separation is again the dominant method of insurance in terms of the market share it represents.

November 13, 2017 | Permalink | Comments (0)