Antitrust & Competition Policy Blog

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

Tuesday, June 28, 2016

The Competition Effect in a Public Procurement Model: An error-in-variables approach

David Sundstrom (Department of Economics, Umea University) theorizes about The Competition Effect in a Public Procurement Model: An error-in-variables approach.

ABSTRACT: Auction theory suggests that as the number of bidders (competition) increases, the sizes of the participants’ bids decrease. An issue in the empirical literature on auctions is which measurement(s) of competition to use. Utilizing a dataset on public procurements containing measurements on both the actual and potential number of bidders I find that a workhorse model of public procurements is best fitted to data using only actual bidders as measurement for competition. Acknowledging that all measurements of competition may be erroneous, I propose an instrumental variable estimator that (given my data) brings about a competition effect bounded by those generated from models using the actual and potential number of bidders, respectively. Also, some asymptotic results are provided for non-linear least squares estimators obtained from a dependent variable transformation model.

June 28, 2016 | Permalink | Comments (0)

Margin squeeze: An above-cost predatory pricing approach

Gaudin, Germain ; Mantzari, Despoina offer Margin squeeze: An above-cost predatory pricing approach.

ABSTRACT: We provide a new legal perspective for the antitrust analysis of margin squeeze conducts. Building on recent economic analysis, we explain why margin squeeze conducts should solely be evaluated under adjusted predatory pricing standards. The adjustment corresponds to an increase in the cost benchmark used in the predatory pricing test by including opportunity costs due to missed upstream sales. This can reduce both the risks of false-positives and false-negatives in margin squeeze cases. We justify this approach by explaining why classic arguments against above-cost predatory pricing typically do not hold in vertical structures where margin squeezes take place and by presenting case law evidence supporting this adjustment. Our approach can help to reconcile the divergent US and EU antitrust stances on margin squeeze.

June 28, 2016 | Permalink | Comments (0)

Monday, June 27, 2016

Market Power in the Poultry Sector in Turkey

Gokhan Ozertan (Bogazici University); Sayed H. Saghaian (University of Kentucky) and Hasan Tekguc (Mardin Artuklu Univeristy) study Market Power in the Poultry Sector in Turkey.

ABSTRACT: In 2009, the Competition Authority (CA) in Turkey penalized 27 broiler chicken producers for agreeing to restrict supply and controlling prices, hence, forming a cartel. The CA based its punishment decision on communication records among major broiler chicken producers, using raw price series and without any statistical or econometric analysis. In this research, time-series methods are employed to test directly for the presence of market power along the supply chain in the poultry sector for both demand and supply sides. The findings show that the retail price behavior in the poultry supply chain in Turkey is consistent with an oligopolistic market structure. Classification JEL: Q11, Q13

June 27, 2016 | Permalink | Comments (0)

OPTIMAL VALUE OF A PATENT IN AN ASYMMETRIC COURNOT DUOPOLY MARKET

Uday Bhanu Sinha (Departments of Economics, Delhi School of Economics, University of Delhi, India) theorizes as to the OPTIMAL VALUE OF A PATENT IN AN ASYMMETRIC COURNOT DUOPOLY MARKET.

ABSTRACT: We consider a mechanism for optimizing the value of a patent owned by an independent patent holder who is not a producer in the market. We consider two kinds of cost reducing innovations: “common innovation” and “new technology innovation” in a homogeneous good Cournot market with ex-ante asymmetric costs of production. We show that the value of the patent is maximized when the patent holder sells the patent to the efficient firm at a fixed payment who would further license the innovation to its rival. This patent sale dominates all other licensing mechanisms for both kinds of innovations.

June 27, 2016 | Permalink | Comments (0)

Market Structure and Competition in the Health-care Industry: Results from a Transition Economy

Martin Labaj (Institute of Economic Research SAS); Alzbeta Siskovicova; Barbora Skalicanova; Peter Silanic; Christoph Weiss; and Biliana Yontcheva evaluate Market Structure and Competition in the Health-care Industry: Results from a Transition Economy.

ABSTRACT: The present paper provides first empirical evidence on the relationship between market size and the number of firms in the health-care industry for a transition economy. We estimate market size thresholds required to support different numbers of suppliers (firms) for three occupations in the health-care industry in a large number of distinct geographic markets in Slovakia, taking into account the spatial interaction between local markets. 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 firms differs both across industries, and across periods. Furthermore, we find evidence for correlation in entry decisions across administrative borders.

June 27, 2016 | Permalink | Comments (0)

Reference pricing with endogenous generic entry

Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Chiara Canta (Department of Economics, Norwegian School of Economics); and Odd Rune Straume (Universidade do Minho - NIPE) study Reference pricing with endogenous generic entry.

ABSTRACT: In this paper we study the effect of reference pricing on pharmaceutical prices and expenditures when generic entry is endogenously determined. We develop a Salop-type model where a brand-name producer competes with generic producers in terms of prices. In the market there are two types of consumers: (i) brand biased consumers who choose between brand-name and generic drugs, and (ii) brand neutral consumers who choose between the different generic drugs. We find that, for a given number of firms, reference pricing leads to lower prices of all products and higher brand-name market shares compared with a reimbursement scheme based on simple coinsurance. Thus, in a free entry equilibrium, the number of generics is lower under reference pricing than under coinsurance, implying that the net effects of reference pricing on prices and expenditures are ambiguous. Allowing for price cap regulation, we show that the negative effect on generic entry can be reversed! , and that reference pricing is more likely to result in cost savings than under free pricing. Our results shed light on the mixed empirical evidence on the effects of reference pricing on generic entry.

June 27, 2016 | Permalink | Comments (0)

Friday, June 24, 2016

The impact of network competition in the mobile industry

Houpis, George ; Rodriguez, Jose Maria ; Ovington, Thomas ; Serdarevic, Goran explore The impact of network competition in the mobile industry.

ABSTRACT: In 2000, there were as many countries served by a single mobile network as by network competition. Today, only 30 countries, representing less than 3% of the world’s population, are served by a single network. There has been considerable discussion about the optimal number of network operators in the mobile industry. More recently, some regulators and governments have considered implementing a single wholesale network to deliver next generation mobile services due to concerns around low coverage, inefficient duplication of costs and lack of competition. To date, the authors are not aware of such single wholesale networks fully implemented in mobile industry. What is clear is that single wholesale networks represent a U-turn with respect the way in which the mobile industry has developed worldwide. Therefore, it is important to carefully examine the available evidence on the performance of mobile markets in countries with a single mobile networks, as thi! s is could shed some light on the expected performance of single wholesale networks. The key result is that countries with network competition have higher coverage, higher take-up and greater innovation than countries with a single mobile network, controlling for other relevant factors. This paper represents a significant contribution to the literature, as the authors are not aware of any other papers that have considered the impact of network competition compared to single networks on outcomes such as coverage. The results of the paper have significant policy implications, as they imply that moving away from the network competition model into the world of single wholesale networks could cause considerable consumer harm, which may be difficult to reverse once there has been a move away from network competition.

June 24, 2016 | Permalink | Comments (0)

Optimal Number of Firms in the Wireless Markets

Francois Jeanjean and Georges Vivien Houngbonon theorize about Optimal Number of Firms in the Wireless Markets.

ABSTRACT: In this paper, we design a theoretical model to analyze the impact of the number of firms on investment in the wireless communications industry. Our model extends the Salop’s framework by introducing investment in quality that either reduces the marginal cost of production or shifts the consumers’ valuation upward. We find that an increase in the number of firms reduces their incentives to invest in quality. The impact on the aggregate industry investment can be non-monotone. These theoretical findings are supported by empirical evidence from the mobile telecommunications industry. More specifically, we find that mobile operators’ investment in network infrastructure is not affected when going from two to three firms; but decreases above three firms. In addition, there is an inverted-U relationship between the industry investment and the number of mobile operators; the maximum being reached at three or four mobile operators.

June 24, 2016 | Permalink | Comments (0)

Thursday, June 23, 2016

Competition and market strategies in the Swiss fixed telephony market

Roberto E. Balmer analyzes Competition and market strategies in the Swiss fixed telephony market.

ABSTRACT: Fixed telephony has long been a fundamentally important market for European telecommunications operators. The liberalisation and the introduction of regulation in the end of the 1990s, however, allowed new entrants to compete with incumbents at the retail level. A rapid price decline and a decline in revenues followed. Increased retail competition eventually led a number of national regulators to deregulate this market. In 2013, however, many European countries (including Switzerland) continued to have partially binding retail price regulation in this market. More than a decade after liberalisation and the introduction of wholesale and retail price regulation, sufficient data is available to empirically measure the success of regulation and assess its continued necessity. This paper develops a market model based on a generalised version of the traditional dominant firm – competitive fringe model allowing for the incumbent a more competitive conduct than! that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent’s residual demand function is performed by instrumenting the market price by incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates the introduction of intertemporal effects. While the incumbent’s conduct cannot be directly estimated using this framework, the concrete estimates show that its residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is shown to be only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is consequently found that the Swiss incumbent acted rather competitiv! ely in the fixed telephony retail market in the period under review (2004-2012) and that the (partial) retail price caps in place can no longer be justified on the basis of a lack of competition.

June 23, 2016 | Permalink | Comments (0)

To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets

Polemis, Michael ; Eleftheriou, Konstantinos ask To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets.

ABSTRACT: This paper attempts to cast light to the relationship between Cournot-Bertrand controversy and monopoly regulation. To this purpose, we use a simple model of a vertically linked market, where an upstream regulated natural monopoly is trading via two-part tariff contracts with a downstream duopoly. Combining our results to those of the existing literature on deregulated markets, we argue that when the downstream competition is in prices, efficiency dictates regulating the monopoly with a marginal cost based pricing scheme. However, this type of regulation leads to significant welfare loss, when the downstream market is characterized by Cournot competition.

June 23, 2016 | Permalink | Comments (0)

Market Structure and Competition in Transition:Results from a Spatial Analysis

Martin Labaj (Department of Economics, Vienna University of Economics and Business) ; Karol Morvay (Department of Economic Policy, University of Economics in Bratislava) ; Peter Silanic (Department of Economic Policy, University of Economics in Bratislava) ; Christoph Weiss (Department of Economics, Vienna Uni! versity of Economics and Business) ; Biliana Yontcheva (Department of Economics, Vienna University of Economics and Business) discuss Market Structure and Competition in Transition:Results from a Spatial Analysis

ABSTRACT: The present paper provides first microlevel (indirect) empirical evidence on changes in the determinants of firm profitability, the role of fixed and sunk costs, as well as the nature of competition for a transition economy. We estimate size thresholds required to support different numbers of firms for four retail and professional service industries in a large number of geographic markets in Slovakia. The three time periods in the analysis (1995, 2001 and 2010) characterize different stages of the transition process. Specific emphasis is given to spatial spill-over effects between local markets. Estimation results obtained from a spatial ordered probit model suggest that entry barriers have declined considerably (except for restaurants) and the intensity of competition has increased. We further find that demand spill-overs and/or the effects associated with a positive correlation in unobservable explanatory variables seem to outweigh negative spill-over e! ffects caused by competitive forces between neighboring cities and villages. The importance of these spatial spill-over effects differs across industries.

June 23, 2016 | Permalink | Comments (0)

Wednesday, June 22, 2016

An Analytical Approach to Activating Demand Elasticity with a Demand Response Mechanism

Cedric Clastres (CNRS - Grenoble 2 UPMF - Universite Pierre Mendes France - IEPG - Sciences Po Grenoble - Universite Joseph Fourier) and Haikel Khalfallah (CNRS - Grenoble 2 UPMF - Universite Pierre Mendes France - IEPG - Sciences Po Grenoble - Universite Joseph Fourier) offer An Analytical Approach to Activating Demand Elasticity with a Demand Response Mechanism.

ABSTRACT: The aim of this work is to demonstrate analytically the conditions under which activating the elasticity of consumer demand could benefit social welfare. We have developed an analytical equilibrium model to quantify the effect of deploying demand response on social welfare and energy trade. The novelty of this research is that it demonstrates the existence of an optimal area for the price signal in which demand response enhances social welfare. This optimal area is negatively correlated to the degree of competitiveness of generation technologies and the market size of the system. In particular, it should be noted that the value of un-served energy or energy reduction which the producers could lose from such a demand response scheme would limit its effectiveness. This constraint is even greater if energy trade between countries is limited. Finally, we have demonstrated scope for more aggressive demand response, when only considering the impact in terms of ! consumer surplus.

June 22, 2016 | Permalink | Comments (0)

State Action Immunity and Section 5 of the FTC Act

Daniel A. Crane, University of Michigan Law School and Adam G. Hester, University of Michigan Law School examine State Action Immunity and Section 5 of the FTC Act.

ABSTRACT: The state action immunity doctrine of Parker v. Brown immunizes anticompetitive state regulations from preemption by federal antitrust law so long as the state takes conspicuous ownership of its anticompetitive policy. In its 1943 Parker decision, the Supreme Court justified this doctrine on the observation that no evidence of a Congressional will to preempt state law appears in the Sherman Act’s legislative history or context. In addition, commentators generally assume that the New Deal Court was anxious to avoid re-entangling the federal judiciary in Lochner-style substantive due process analysis. The Supreme Court has observed, without deciding, that the Federal Trade Commission might not be bound by the Parker doctrine but instead enjoys “superior preemption” authority under Section 5 of the FTC Act. Drawing on the FTC Act’s legislative history and its institutional distinctiveness from Sherman Act enforcement, this Article makes an affirmative case for FTC superior preemption power over anticompetitive state laws.

 

 

June 22, 2016 | Permalink | Comments (0)

THE ECONOMICS OF PASS-THROUGH WITH PRODUCTION CONSTRAINTS

Dov Rothman, Philipp Tillmann and David Toniatti (all Analysis Group) describe THE ECONOMICS OF PASS-THROUGH WITH PRODUCTION CONSTRAINTS.

ABSTRACT: This article reviews the implications of production constraints for pass-through. We consider production technology that can only be adjusted in discrete intervals and/or is costly to adjust. We show that, because of production constraints, a firm may not be willing to adjust its level of production in response to small changes in cost. Because price is determined by demand and the quantity produced, production constraints may result in a firm not changing price in response to a change in cost. This result has important implications for antitrust litigation—for example, the extent to which overcharges resulting from anticompetitive conduct upstream in the supply chain are passed through to purchasers downstream in the supply chain.

June 22, 2016 | Permalink | Comments (0)

DESIGNING AUCTIONS TO PROTECT COMPETITION AND TO PROMOTE EFFICIENCY AND REVENUE

Jia Yi Jayme Leong (Competition Commission of Singapore) and Hi Lin Tan, Competition Commission of Singapore are DESIGNING AUCTIONS TO PROTECT COMPETITION AND TO PROMOTE EFFICIENCY AND REVENUE.

ABSTRACT:  The use of auctions has become increasingly widespread, from the allocation of resources like electricity and spectrum, to the selling of personal items on online websites like eBay. Invitations to tender or to quote are standard procurement methods for government agencies. Against this backdrop, it is important to be aware that the design of auctions and tenders can affect antitrust risks, with further implications on allocative efficiency and revenues. Further, policymakers should keep in mind that an auction may in certain circumstances create a downstream monopoly, potentially resulting in welfare loss and higher prices downstream. This research paper provides an overview of different auction designs, compares their antitrust risks and effectiveness in achieving allocative efficiency and revenue maximization, and discusses some proposals to mitigate antirust risks.

June 22, 2016 | Permalink | Comments (0)

Tuesday, June 21, 2016

HOW PASS-ON THEORY SHOULD BE APPLIED IN KOREAN ANTITRUST LITIGATION

Se-In Lee, Pusan National University School of Law explains HOW PASS-ON THEORY SHOULD BE APPLIED IN KOREAN ANTITRUST LITIGATION.

ABSTRACT: In this article, I analyze and support the Korean Supreme Court's acceptance of pass-on theory in the recent flour price-fixing case decided in 2012. Since Korea belongs to the civil law system that aims at making actual damage compensation by private litigation, I agree with the court that a defendant should not be required to pay more than the actual damage suffered by plaintiffs. The Supreme Court stated that a defendant should establish a causal link between the alleged overcharge and any recovery made to plaintiffs through pass-on, but concluded that the required causal link was not established in the present flour price-fixing case. However, a notable feature of the judgment was that the Supreme Court allowed a reduction of the final damages awarded anyway, not on the basis of pass-on theory, but based on the notion of fairness. I support the Korean Supreme Court's decision to allow the pass-on defense to run, with burden of proof to establish it resting on the defendant. However, I suggest that the Korean courts should not calculate a reduction of damages according to the notion of fairness when a defendant cannot establish the pass-on causal link. It is time for the Korean courts to rely on a more concrete way of calculating damages than selecting some arbitrary numbers based on the notion of fairness.

June 21, 2016 | Permalink | Comments (0)

A RETROSPECTIVE ON MERGER RETROSPECTIVES IN THE UNITED STATES

Malcolm Coate, FTC offers A RETROSPECTIVE ON MERGER RETROSPECTIVES IN THE UNITED STATES.

ABSTRACT: Over the last decade, merger retrospectives have become increasingly popular in the economic literature. However, it is far from clear what implications can be drawn from these analyses, because the results suffer from a sample selection problem that undermines their implications. This article uses models of the Federal Trade Commission's enforcement activity to estimate challenge probabilities and address the selection issue. Although the small size of the sample limits the statistical interpretation of the results, general observations are possible. First, significant price effects generally appear in markets with very high challenge probabilities. When challenge probabilities are moderate, say 30 to 70 percent, retrospective results generate price effects in roughly half of the studies. For markets with low challenge probabilities, no price effects are observed in the retrospectives related to collusion theories. Positive price effects are observed for most of the retrospectives in differentiated goods markets, but theoretical analyses imply that most those results are highly problematic. Although retrospectives, interpreted in light of the likely competitive concern, can serve as a test for merger policy, an anomaly between the retrospective and the relevant policy prediction requires some type of case study to be undertaken to resolve the stark difference in implications prior to the analysis. More complete case studies are needed to fulfill the true promise of the retrospective research regime.

June 21, 2016 | Permalink | Comments (0)

Antitrust Balancing

Herb Hovenkamp (Iowa) is thinking about Antitrust Balancing.

ABSTRACT: Antitrust litigation often confronts situations where effects point in both directions. Judges sometimes describe the process of evaluating these factors as “balancing.” In its e-Books decision the Second Circuit believed that the need to balance is what justifies application of the rule of reason. In Microsoft the D.C. Circuit stated that “courts routinely apply a…balancing approach” under which “the plaintiff must demonstrate that the anticompetitive harm…outweighs the procompetitive benefit.” But then it decided the case without balancing anything.

The term “balancing” is a very poor label for what courts actually do in these cases. Balancing requires that two offsetting effects can each be measured against each other by some common cardinal unit, such as dollars or tons or centimeters. The factors that courts consider under the rule of reason rarely lend themselves to such measurement. Instead, balancing approaches are usually “binary” rather than cardinal. They are more like off and on switches that go in one direction or the other.

The Ninth Circuit’s decision in O’Bannon v. NCAA understood these limitations and performed balancing the way it should be done. In defending its compensation rules the court observed both the NCAA’s and the courts’ longstanding recognition of amateurism in collegiate athletics as requiring uncompensated play. This created a binary rule that a court could readily follow. The district court’s creation of a trust fund for deferred compensation and judicial determination of the payout was simply price regulation by another name.

One place where a more cardinal form of balancing can work is merger analysis, particularly under the 2010 Horizontal Merger Guidelines. The government’s prima facie challenge to a merger is based on a prediction of increased prices. If the test is met then the burden shifts to the defendant to show merger specific efficiencies of sufficient magnitude to reduce the predicted price to no higher than premerger levels.

Stating consumer price increases as the principal concern creates a unit of measure that makes balancing at least conceptually possible. Second, the consumer price test articulated in the Guidelines is easier to administer than a general welfare test. In order to estimate general welfare effects one must be able to quantify consumer harm, which includes not only higher prices but also deadweight loss. This requires information about the shape of the demand curve. In addition, offsetting efficiencies must always be assessed and netted out. This requires a court to look not only at per unit cost savings, but also at the output over which those costs will be spread.

Whether the Merger Guidelines more cardinal approach to balancing can be migrated to general antitrust litigation under the rule of reason depends on the challenged practice. Joint ventures with efficiency potential but threatening higher prices from collusion are a likely candidate. Practices that threaten exclusion will be more difficult to evaluate. Practices whose consequences show up in the longer run will be particularly difficult, as well as practices for which the defense has little to do with measurable prices.

June 21, 2016 | Permalink | Comments (0)

Antitrust Liability for Licensing Boards After North Carolina Dental: Antitrust Preemption as a Penalty Default?

James Cooper, George Mason asks Antitrust Liability for Licensing Boards After North Carolina Dental: Antitrust Preemption as a Penalty Default?

ABSTRACT: Most professions in the United States are regulated by boards composed of industry practitioners, who in their official roles routinely engage in anticompetitive conduct. Until the Supreme Court’s landmark decision in North Carolina State Board of Dental Examiners v. FTC, many believed that such conduct was beyond the reach of antitrust enforcement as long as it was taken pursuant to state policy to displace competition — a standard met with relative ease. After North Carolina Dental, states now must additionally take ownership of the anticompetitive actions of these boards to avoid the full force of the antitrust laws. In this manner, North Carolina Dental has the potential to prompt a large-scale restructuring of the state regulatory apparatus. This article explores the potential for antitrust preemption to play a role in this restructuring. I argue that, to the extent that unsupervised boards’ anticompetitive conduct would be justified on non-competition concerns, they are rendered defenseless in any rule of reason inquiry, and hence are subject to a de facto per se standard. Rather than adjusting the rule of reason inquiry to allow courts to weigh non-competition concerns in these cases, the better alternative would be to preempt the laws altogether. This approach has several advantages. First, it would avoid a dissonance between antitrust and due process inquiries into the same conduct. Second, it would act as a penalty default for states, and like penalty defaults in contracts, such a rule would assign the regulatory decision to the low-cost information provider — the state, rather than the court. Finally, this approach vindicates federalism to a greater extent than a modified rule of reason. The only role for a federal court under a preemption approach would be to uphold or strike down the law granting the board authority to engage in the suspect conduct. This decision, moreover, would be based on an objective analysis of the board’s regulatory structure, rather than a subjective weighing of competition and non-competition concerns.

 

 

June 21, 2016 | Permalink | Comments (0)

Monday, June 20, 2016

My daughter Elena is not the only Princess Elena

Elena came home today to inform me that there is a new Princess named Elena of Avalor. She is excited that there is another princess named Elena that will call her father Papi.  

From Disneypedia:

As with all Disney Junior programming, Elena of Avalor stories will be guided by an established curriculum that nurtures multiple areas of child development: physical, emotional, social and cognitive; thinking and creative skills, as well as moral and ethical development. Created for kids age 2-7 and their families, the stories are designed to communicate positive messages and life lessons that are applicable to young children about leadership, resilience, diversity, compassion and the importance of family and family traditions.

June 20, 2016 | Permalink | Comments (0)