Monday, April 3, 2017
Marco Marini describes Collusive Agreements in Vertically Differentiated Markets.
ABSTRACT: This survey introduces a number of game-theoretic tools to model collusive agreements among firms in vertically differentiated markets. I firstly review some classical literature on collusion between two firms producing goods of exogenous different qualities. I then extend the analysis to a n-firm vertically differentiated market to study the incentive to form either a whole market alliance or partial alliances made of subsets of consecutive firms in order to collude in prices. Within this framework I explore the price behaviour of groups of colluding firms and their incentive to either pruning or proliferating their products. It is shown that a selective pruning within the cartel always occurs. Moreover, by associating a partition function game to the n-firm vertically differentiated market, it can be shown that a sufficient condition for the cooperative (or coalitional) stability of the whole industry cartel is is the equidistance of firms' products along the quality spectrum. Without this property, and in presence of large quality differences, collusive agreements easily loose their stability. In addition, introducing a standard infinitely repeated-game approach, I show that an increase in the number of firms in the market may have contradictory effects on the incentive of firms to collude: it can make collusion easier for bottom and intermediate firms and harder for the top quality firm. Finally, by means of a three-firm example, I consider the case in which alliances can set endogenously qualities, prices and number of variants on sale. I show that, in every formed coalition, (i) market pruning dominates product proliferation and (ii) partial cartelisation always arises in equilibrium, with the bottom quality firm always belonging to the alliance.
Thomas D. Jeitschko; Ting Liu; and Tao Wang have an interesting paper on Information Acquisition, Signaling and Learning in Duopoly.
ABSTRACT: We study firms’ incentives to acquire private information in a setting where subsequent competition leads to firms’ later signaling their private information to rivals. Due to signaling, equilibrium prices are distorted, and so while firms benefit from obtaining more precise private information, the value of information is reduced by the price distortion. Thus, compared with firms that do not attempt to manipulate rivals’ beliefs, signaling firms acquire less precise information. An industry-wide trade-association acquiring information increases firm profit and may also increase consumer surplus, so allowing such collective action may be in the interest of regulatory authorities.
Max Klasse (Blomstein) and Lars Wiethaus (CRA) are Adapting German competition law to the digital economy.
ABSTRACT: A major objective of the 9th amendment of the German Act against Restraints of Competition is to adapt German competition law to the challenges of the digital economy. This article discusses two amendments. First, the amendment will add a new transaction-value-based notification threshold with a view to covering transactions where the consideration exceeds EUR 400 million, provided that the target has considerable activities in Germany. The new rule aims to close a perceived enforcement gap with regard to acquisition targets with a high economic or innovative potential that are not covered by the existing thresholds. However, there is not a single problematic case which escaped scrutiny on the basis of the existing thresholds, leaving the enforcement gap yet to be established. At the same time, the new rule may create legal uncertainty, for example if the transaction value is affected by „Earn-Out” or „Share-for-Share” clauses. The definition of „significant activities in Germany” requires clarification as well and it will be for the German Federal Cartel Office to provide guidance. Second, the amendment clarifies that a relevant market may exist even if a service is provided without monetary compensation. Whilst the German Federal Cartel Office has defined such markets in the past, German courts ruled against it. The clarification is useful, in general, as it accommodates economics of two-sided platforms. However, concerns would arise if the law encouraged the definition of markets without (or too little) regard to the monetary side of a market. Such practice is not uncommon for ad-financed services, such as general search, news and social networking. Ignoring the interaction of such services with the monetizing side of the market may lead to too narrow market definitions. This article therefore suggests that, even if services that are provided without monetary compensation are considered a relevant market, competitive constraints through the monetizing (usually advertising) side have to be taken into account when deriving the scope of the market.
Pierre Bernhard (Université Côte d’Azur, INRIA) and Marc Deschamps (Université de Bourgogne Franche-Comté, CRESE) discuss Cournot oligopoly with randomly arriving producers.
ABSTRACT: Cournot model of oligopoly appears as a central model of strategic interaction between competing firms both from a theoretical and applied perspective (e.g antitrust). As such it is an essential tool in the economics toolbox and always a stimulus. Although there is a huge and deep literature on it and as far as we know, we think that there is a ”mouse hole” wich has not already been studied: Cournot oligopoly with randomly arriving producers. In a companion paper [Bernhard and Deschamps, 2016b] we have proposed a rather general model of a discrete dynamic decision process where producers arrive as a Bernoulli random process and we have given some examples relating to oligopoly theory (Cournot, Stackelberg, cartel). In this paper we study Cournot oligopoly with random entry in discrete (Bernoulli) and continuous (Poisson) time, whether time horizon is finite or infinite. Moreover we consider here constant and variable probability of entry or density of arrivals. In this framework, we are able to provide algorithmes answering four classical questions: 1/ what is the expected profit for a firm inside the Cournot oligopoly at the beginning of the game?, 2/ How do individual quantities evolve?, 3/ How do market quantities evolve?, and 4/ How does market price evolve?
When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly
Billette de Villemeur, Etienne ; Ruble, Richard ; and Versaevel, Bruno ask When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly.
ABSTRACT: We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving.
Saturday, April 1, 2017
George Mason has launched an LLM in antitrust law. You can read about the faculty here. To my knowledge it is the only faculty that has had leaders of both the DOJ (Ginsburg) and FTC (Muris) teaching at the same school at the same time. I wish the school great luck. It has a very talented group of faculty.
With Howard Shalanski back to Georgetown from the Obama Administration rejoining Steve Salop and Bill Kovacic lamentably all alone at GW, might more students choose a George Mason LLM over Georgetown and GW? Time will tell. A lot depends on the depth and breadth of the antitrust curriculum.
Friday, March 31, 2017
Pierre Picard (Ecole Polytechnique [Palaiseau]) and Kili Wang (Tamkang University) examine Collusion in Vertical Relationships: The Case of Insurance Fraud in Taiwan.
ABSTRACT: The delegation of services from producers to retailers is frequently at the origin of transaction costs, associated with the discretion in the way retailers do their job. This is particularly the case when retailers and customers collude to exploit loopholes in the contracts between producers and customers. In this paper, we analyze how insurance distribution channels may affect such misbehaviors, when car repairers are joining policy holders to defraud insurers. We focus attention on the Taiwan automobile insurance market by using a database provided by the largest Taiwanese automobile insurer. The theoretical underpinning of our analysisis provided by a model of claims fraud with collusion and audit. Our econometric analysis con firms that fraud occurs through the postponing of claims to the end of the policy year, possibly by filing on single claim for several events. It highlights the role of car dealer owned insurance agents in the collusive fraud mechanism.
Giuseppe Moscelli (Centre for Health Economics, University of York, York, UK.) ; Hugh Gravelle (Centre for Health Economics, University of York, York, UK.); and Luigi Siciliani (Department of Economics and Related Studies, University of York, York, UK.) describe Market structure, patient choice and hospital quality for elective patients.
ABSTRACT: We examine the change in the effect of market structure on hospital quality for elective procedures (hip and knee replacements, and coronary artery bypass grafts) following the 2006 loosening of restrictions on patient choice of hospital in England. We allow for time-varying endogeneity due to the effect of unobserved patient characteristics on patient choice of hospital using Two Stage Residual Inclusion. We find that the change in the effect of market structure due to the 2006 choice reforms was to reduce quality by increasing the probability of a post-operative emergency readmission for hip and knee replacement patients. There was no effect of the choice reform on hospital quality for coronary bypass patients. We find no evidence of self-selection of patients into hospitals, suggesting that a rich set of patient-level covariates controls for differences in casemix.
Autor, David ; Dorn, David ; Hanson, Gordon ; Pisano, Gary ; Shu, Pian have an empirical paper on Foreign Competition and Domestic Innovation: Evidence from U.S. Patents.
ABSTRACT: Manufacturing is the locus of U.S. innovation, accounting for more than three quarters of U.S. corporate patents. The rise of import competition from China has represented a major competitive shock to the sector, which in theory could benefit or stifle innovation. In this paper we empirically examine how rising import competition from China has affected U.S. innovation. We confront two empirical challenges in assessing the impact. We map all U.S. utility patents granted by March 2013 to firm-level data using a novel internet-based matching algorithm that corrects for a preponderance of false negatives when using firm names alone. And we contend with the fact that patenting is highly concentrated in certain product categories and that this concentration has been shifting over time. Accounting for secular trends in innovative activities, we find that the impact of the change in import exposure on the change in patents produced is strongly negative. It remains so once we add an extensive set of further industry- and firm-level controls. Rising import exposure also reduces global employment, global sales, and global R&D expenditure at the firm level. It would appear that a simple mechanism in which greater foreign competition induces U.S. manufacturing firms to contract their operations along multiple margins of activity goes a long way toward explaining the response of U.S. innovation to the China trade shock.
Thursday, March 30, 2017
Tom Hamami provides Network Effects, Bargaining Power, and Product Review Bias: Theory and Evidence.
ABSTRACT: I construct a theoretical framework for expert product reviews and demonstrate how the existence of positive network effects can make review inflation profitable even when fully rational consumers understand the existence of bias. This finding moreover suggests that product reviews, in addition to transmitting information, may also serve as a coordination mechanism for early adopters. Empirical application to video game review data suggests that this industry is in an inflation equilibrium. Specifically, I find evidence that reviews are inflated for games produced by large firms and for those that are part of pre-existing game franchises. Additionally, I find that review inflation is heterogeneous across genres that vary by the extent to which they produce network externalities, and I argue that this result is inconsistent with alternative explanations of review inflation.
Michael Kurschilgen (Max Planck Institute for Research on Collective Goods) ; Alexander Morell (Max Planck Institute for Research on Collective Goods) ; and Ori Weisel (Coller School of Management, Tel Aviv University) discuss Internal conflict, market uniformity, and transparency in price competition between teams.
ABSTRACT: The way profits are divided within successful teams imposes different degrees of internal conflict. We experimentally examine how the level of internal conflict, and whether such conflict is transparent to other teams, affects teams' ability to compete vis-à-vis each other, and, consequently, market outcomes. Participants took part in a repeated Bertrand duopoly game between three-player teams which had either the same or different level of internal conflict (uniform vs. mixed). Profit division was either private-pay (high conflict; each member received her own asking price) or equal-pay (low conflict; profits were divided equally). We find that internal conflict leads to (tacit) coordination on high prices in uniform private-pay duopolies, but places private-pay teams at a competitive disadvantage in mixed duopolies. Competition is softened by transparency in uniform markets, but intensified in mixed markets. We propose an explanation of the results and discuss implications for managers and policy makers.
Dutta, Goutam ; Natesan, Sumeetha R. analyze Optimization of Customized Pricing with Multiple Overlapping Competing Bids.
ABSTRACT: In this paper, we consider the case of project procurement where there is a single buyer and multiple sellers who are bidding. We consider one seller having one or more competitors. We formulate the pricing problem from the point of view of one seller having one or multiple competitors (say n). We also assume that based on past experience, we have some idea about the distribution of bid prices of the competitors. We consider uniform distribution to describe the bid price of the competitors. The prices of the competitors are pairwise mutually independent and the price range are either identical or different and overlapping. We consider maximizing the expected contribution. Assuming the contribution as a linear function of price we compute the conditions for maximization of the expected contribution to profit in case of n bidders. Further, we also compare the optimization results with simulation results.
Sveinn Vidar Gudmundsson, Toulouse Business School has written on the Oligopolization of Markets.
ABSTRACT: In this paper, concentration in US air transport markets is assessed by calculating the Herfindahl-Hirschman Index for domestic versus international markets separately. The findings show that industry concentration in the US domestic market fluctuates substantially, usually increasing in the years following recessions, when the number of financially weak carriers in the industry increases, and receding during periods of economic prosperity. Overall, the oligopolistic characteristics of the domestic market are stronger than in international markets, yet both markets do not show strong concentration using the US Department of Justice criteria. One explanation is that the industry has had a large number of new entrants since deregulation that have challenged the legacy carriers in the domestic market in a sustainable way. The Herfindahl-Hirschman Index for US international markets is showing signs of increased concentration among US carriers but reduced concentration among international airlines. So far as entry barriers are not overwhelming, the industry concentration is likely to fluctuate according to economic cycles and shocks. US domestic concentration indices may continue to increase, as low-cost airlines with competitive advantage grow, while legacy airlines strive to maintain position through mergers and acquisitions.
Wednesday, March 29, 2017
Bronnenberg, Bart ; Dube, Jean-Pierre examine The Formation of Consumer Brand Preferences.
ABSTRACT: Brands and brand capital have long been theorized to play an important role in the formation of the industrial market structure of consumer goods industries. We summarize several striking empirical regularities in the concentration, magnitude and persistence of brand market shares in consumer goods categories. We then survey the theoretical and empirical literatures on the formation of brand preferences and how brand preferences contribute to our understanding of these empirical regularities. We also review the literature on how brand capital creates strategic advantages to firms that own established brands.
William W. Berry III, University of Mississippi School of Law has written on Employee-Athletes, Antitrust, and the Future of College Sports.
ABSTRACT: The Ninth Circuit’s antitrust analysis in its recent college sports cases centers on whether amateurism offers a pro-competitive justification for its restraint on athlete compensation. Specifically, the question is whether the market for college football and basketball would suffer if universities paid their athletes. Despite this framing, there remains an implicit assumption driving the analysis—the determination of whether to characterize athletes as “employee-athletes” or “student-athletes.”
Specifically, this Article argues that the determination of whether college athletes are employees constitutes the central question in determining how the courts ought to apply the Sherman Act in this context. Having made the implicit assumptive concept explicit, the Article explores four key questions that should bear on the determination of whether college athletes are employees. The Article then concludes by proposing that the employee-athlete question is not bi-modal, but rather a spectrum, providing a map for universities and administrators eager to preserve the current status quo.
Part I explains the competing arguments raised in O’Bannon and their likely application in Jenkins. Part II argues that the real question does not concern economics and markets, but instead rests upon the question of whether athletes are employees. Part III frames the potential analysis of the employee question suggesting four indicia that ought to guide this determination. Finally, Part IV provides a road map for saving the status quo in light of the employee-athlete question.
Astrid Cullmann, German Institute for Economic Research (DIW Berlin), Maria Nieswand, German Institute for Economic Research (DIW Berlin), and Julia Rechlitz, German Institute for Economic Research (DIW Berlin) address Productive Efficiency and Ownership When Market Restructuring Affects Production Technologies.
ABSTRACT: While the link between the ownership and productive efficiency of firms has been discussed extensively, no consensus exists regarding the superiority of one or the other in non-competitive, regulated environments. This paper applies a flexible production model to test for efficiency differences associated with ownership types while allowing the production to adapt to market restructuring over time. Our empirical setting is based on a new, rich micro dataset of electricity distribution firms operating between 2006 and 2012 in Germany, where the energy transition enforces the adjustment of energy infrastructure. First, our results show that electricity distribution system operators adapted their production technologies over time. Second, there is no empirical evidence that public firms operated any less efficiently than private firms. The empirical findings are relevant to the (re)municipalization debate, which appears to have exaggerated the dichotomy between public and private utilities’ efficiency.
M. Rocha and T. Greve consider Contracting in a market with differential information.
ABSTRACT: This Consider an oligopolistic industry where two firms have access to the same technology and compete in prices, but one firm has access to better information about the customers in the market. We assume that better information allows the better informed firm to attract specific customers. The better informed firm obtains a first customer contact advantage, whereas the uninformed firm can only offer a menu of prices without being able to pre-identify the types of customers. We show that better information does not lead to higher profit.
Elpiniki Bakaouka, Athens University for Economics and Business and Chrysovalantou Milliou, Athens University of Economics and Business discuss Vertical Licensing, Input Pricing, and Entry.
ABSTRACT: We explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm, transforming the licensee into its input supplier. We find that the incumbent opts for licensing even when licensing also transforms the licensee into one of its direct competitors in the final products market. In fact, the licensee's entry into the final products market, although increases the competition and the cost that the licensor faces, it reinforces, instead of weakens, the licensing incentives. Furthermore, the licensee's entry augments the positive welfare implications of vertical licensing.
Tuesday, March 28, 2017
Daniel P. O'Brien, Bates White Economic Consulting and Keith Waehrer, Bates White Economic Consulting argue The Competitive Effects of Common Ownership: We Know Less than We Think.
ABSTRACT: Recent empirical research purports to show that common ownership by institutional investors harms competition even when all financial holdings are minority interests. This research has received a great deal of attention, leading to both calls for and actual changes in antitrust policy. This paper examines the research on this subject to date and finds that its conclusions regarding the effects of minority shareholdings on competition are not well established. Without prejudging what more rigorous empirical work might show, we conclude that researchers and policy authorities are getting well ahead of themselves in drawing policy conclusions from the research to date. The theory of partial ownership does not yield a specific relationship between price and the MHHI. In addition, the key explanatory variable in the emerging research – the MHHI – is an endogenous measure of concentration that depends on both common ownership and market shares. Factors other than common ownership affect both price and the MHHI, so the relationship between price and the MHHI need not reflect the relationship between price and common ownership. Thus, regressions of price on the MHHI are likely to show a relationship even if common ownership has no actual causal effect on price. The instrumental variable approaches employed in this literature are not sufficient to remedy this issue. We explain these points with reference to the economic theory of partial ownership and suggest avenues for further research.