Antitrust & Competition Policy Blog

Pricing with algorithms

Pricing with algorithms

By:

Rohit Lamba; Sergey Zhuk

Abstract:

This paper studies Markov perfect equilibria in a repeated duopoly model where sellers choose algorithms. An algorithm is a mapping from the competitor's price to own price. Once set, algorithms respond quickly. Customers arrive randomly and so do opportunities to revise the algorithm. In the simple game with two possible prices, monopoly outcome is the unique equilibrium for standard functional forms of the profit function. More generally, with multiple prices, exercise of market power is the rule -- in all equilibria, the expected payoff of both sellers is above the competitive outcome, and that of at least one seller is close to or above the monopoly outcome. Sustenance of such collusion seems outside the scope of standard antitrust laws for it does not involve any direct communication.

Data and Market Power

Data and Market Power

By:

Jan Eeckhout; Laura Veldkamp

Abstract:

Might firms' use of data create market power? To explore this hypothesis, we craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups. The tradeoff between these forces depends on the level of aggregation at which markups are measured. Empirical researchers who measure markups at the product level, firm level or industry level come to different conclusions about trends and cyclical fluctuations in markups. Our results reconcile and re-interpret these facts. The divergence between product, firm and industry markups can be a sign that firms are using data to reallocate production to the goods consumers want most.

Network Externalities, Dominant Value Margins, and Equilibrium Uniqueness

Network Externalities, Dominant Value Margins, and Equilibrium Uniqueness

By:

Jay Pil Choi; Christodoulos Stefanadis

Abstract:

We examine tippy network markets that accommodate price discrimination. The analysis shows that when a mild equilibrium refinement, the monotonicity criterion, is adopted, network competition may have a unique subgame-perfect equilibrium regarding the winner’s identity; the prevailing brand may be fully determined by its product features. We bring out the concept of the dominant value margin, which is a metric of the effectiveness of divide-and-conquer strategies. The supplier with the larger dominant value margin may always sell to all customers in equilibrium. Such a market outcome is not always socially efficient since a socially inferior supplier may prevail if has a stand-alone-benefit advantage and only a modest network-benefit disadvantage.

Mergers and Product Repositioning: Theory and Empirical Evidence

Mergers and Product Repositioning: Theory and Empirical Evidence

 

Soo-Haeng Cho

Carnegie Mellon University - Tepper School of Business

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Xin Wang

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

yushu zeng

Hong Kong University of Science and Technology

Abstract

Mergers often induce firms to modify both product quality and variety. The impact of such changes has received scant attention in merger literature, which mostly focuses on price changes. We develop a game-theoretical model to investigate the changes of quality, variety, and price after a merger and their impacts on firms and consumers. In the case when the merged firm continues to offer the same number of products, we find that the merged firm reduces both product qualities and prices. Although consumers benefit from the lower prices, they are still worse off because of the lower qualities. In the case when the merged firm consolidates product offerings to achieve cost savings, the product quality and price may also be reduced. Due to the reduced quality, consumers can be hurt by such a merger even though they pay a lower price after the merger. These findings are in sharp contrast to the merger literature that studies price alone, which predicts that consumers benefit from a merger if price is reduced after a merger. By comparing the two cases with different numbers of products provided by the merged firm, we find that cost savings from consolidating the products benefit the merged firm, but might hurt consumers. We then find empirical evidence by employing a multi-period difference-in-differences model to investigate the quality and price changes after mergers, using observational data from the airline industry. The empirical findings are consistent with our theoretical results on the merging firms' quality and price changes, which further confirm that a merger must be evaluated in an integrated way by examining its impact on product quality and variety as well as price.

Transaction Costs in Common Ownership

Transaction Costs in Common Ownership

 

Kenneth Khoo

National University of Singapore (NUS) - Faculty of Law

Abstract

A phenomenon known as “Common Ownership” arises when shareholders hold substantial stakes in competing firms. Although recent empirical evidence has illustrated how common concentrated owners are associated with higher product market prices and lower output, scholars remain divided as to the precise mechanism through which common ownership can induce anti-competitive outcomes. In this article, I propose a novel framework to evaluate the plausibility of candidate mechanisms of anti-competitive harm in common ownership. I argue that all disagreements over the anti-competitive mechanisms of common ownership hinge on a central determinant: the transaction costs of internalizing pecuniary externalities between portfolio firms. I define two broad categories of transaction costs: information costs and coordination costs. Information costs relate to costs involved in implementing mechanisms of anticompetitive harm that rely on unilateral effects, while coordination costs relate to costs involved in implementing mechanisms that rely on coordinated effects. Where the transaction costs of internalizing such externalities are positive, common owners will tradeoff the gains from internalizing these externalities with the costs involved in doing so. I characterize this tradeoff by introducing a new parameter – “tailoring”. The degree of tailoring reflects the extent to which a common owner would rationally exert actual control. Highly tailored mechanisms internalize more pecuniary externalities, but incur more transaction costs. On the other hand, untailored mechanisms internalize fewer pecuniary externalities, but incur less transaction costs.

In the context of institutional investing, my analytical framework suggests that institutional investors who are also common owners face large transaction costs in implementing highly tailored mechanisms. These investors are far more likely to pursue relatively untailored mechanisms effects instead. Similarly, institutional investors face relatively large transaction costs in implementing mechanisms which induce unilateral effects, and are thus likely to prefer mechanisms that induce coordinated effects. I contend that optimal policy responses to the anti-competitive effects of common ownership should focus on mechanisms which institutional investors are likely to harness in reducing competition between their portfolio firms. Here, legal reforms can play a critical role in changing the incentives of common owners by increasing the transaction costs of implementing particular mechanisms of anti-competitive harm and in changing the incentives of non-common owners by decreasing the transaction costs of implementing pro-competitive mechanisms. These mechanism specific remedies have significant advantages when compared to competing proposals in the literature.

Private Monopoly and Restricted Entry - Evidence from the Notary Profession

Private Monopoly and Restricted Entry - Evidence from the Notary Profession

 

 

Frank Verboven

KU Leuven

Biliana Yontcheva

Vienna University of Economics and Business

Abstract

We study entry restrictions in a private monopoly: the Latin notary system. Under this widespread system, the state appoints notaries and grants them exclusive rights to certify various important economic transactions, including real estate, business registrations, and marriage and inheritance contracts. We develop an empirical entry model to uncover the current policy goals behind the geographic entry restrictions. The entry model incorporates a spatial demand model to infer the extent of market expansion versus business stealing from entry, and a multi-output production model to determine the markups for real estate and other transactions. We find that the entry restrictions primarily serve producer interests, and give only a small weight to consumer surplus, even conditional on the current high markups. We subsequently perform policy counterfactuals with welfare-maximizing and free entry. We show how reform would generate considerable welfare improvements, and imply a substantial redistribution towards consumers without threatening geographic coverage.

Cost-Price Relationships in a Concentrated Economy

Cost-Price Relationships in a Concentrated Economy

By:

Falk Bräuning; José Fillat; Gustavo Joaquim

Abstract:

The US economy is at least 50 percent more concentrated today than it was in 2005. In this paper, we estimate the effect of this increase on the pass-through of cost shocks into prices. Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. The resulting above-trend price growth lasts for about four quarters. Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply-chain disruptions and a tight labor market.

Oligopoly under incomplete information: on the welfare effects of price discrimination

Oligopoly under incomplete information: on the welfare effects of price discrimination

By:

Daniel F. Garrett (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Renato Gomes (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Lucas Maestri (FGV-EPGE - Universidad de Brazil)

Abstract:

We study competition by firms that simultaneously post (potentially nonlinear) tariffs to consumers who are privately informed about their tastes. Market power stems from informational frictions, in that consumers are heterogeneously informed about firms' offers. In the absence of regulation, all firms offer quantity discounts. As a result, relative to Bertrand pricing, imperfect competition benefits disproportionately more consumers whose willingness to pay is high, rather than low. Regulation imposing linear pricing hurts the former but benefits the latter consumers. While consumer surplus increases, firms' profits decrease, enough to drive down utilitarian welfare. By contrast, improvements in market transparency increase utilitarian welfare, and achieve similar gains on consumer surplus as imposing linear pricing, although with limited distributive impact. On normative grounds, our analysis suggests that banning price discrimination is warranted only if its distributive benefits have a weight on the societal objective.

Nonlinear Pricing in Oligopoly: How Brand Preferences Shape Market Outcomes

Nonlinear Pricing in Oligopoly: How Brand Preferences Shape Market Outcomes

By:

Renato Gomes (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Jean-Marie Lozachmeur (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Lucas Maestri (FGV-EPGE - Universidad de Brazil)

Abstract:

We study oligopolistic competition by firms practicing second-degree price discrimination. In line with the literature on demand estimation, our theory allows for comovements between consumers' taste for quality and propensity to switch brands. If low-type consumers are sufficiently less (more) brand loyal than high types, (i) quality provision is inefficiently low at the bottom (high at the top) of the product line, and (ii) informational rents are negative (positive) for high types, while positive (negative) for low types. We produce testable comparative statics on pricing and quality provision, and show that more competition (in that consumers become less brand-loyal) is welfare-decreasing whenever it tightens incentive constraints (so much so that monopoly may be welfare-superior to oligopoly). Interestingly, pure-strategy equilibria fail to exist whenever brand loyalty is sufficiently different across consumers types. Accordingly, price/quality dispersion ensues from the interplay between self-selection constraints and heterogeneity in brand loyalty.

Concentration and Markups: Evidence from Retail Lotteries

Concentration and Markups: Evidence from Retail Lotteries

 

Brett Hollenbeck

University of California, Los Angeles (UCLA) - Anderson School of Management

Renato Giroldo

affiliation not provided to SSRN

 

Abstract

In this note, we provide a cleanly identified and empirically relevant example of a setting where an increase in market concentration caused lower prices and markups. This result contradicts some widely used models of competition and highlights the value of richer models of firm behavior and competition in the debate over concentration and market power. Our setting is the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. The data allow us to compute markups directly by observing wholesale prices. We find a negative causal relationship between markups and concentration, where exogenously more concentrated markets have significantly lower markups and prices.

Innovation, Antitrust Enforcement, and the Inverted-U

Innovation, Antitrust Enforcement, and the Inverted-U

 

Richard Gilbert

University of California, Berkeley

Christian Riis

Norwegian Business School

Erlend Riis

University of Cambridge

 

Abstract

The effects of monopoly power or mergers on incentives to innovate are important issues for antitrust enforcement, but they receive relatively little attention in litigated cases compared to the analysis of predicted effects on prices. This paper reviews what is known about the relationship between market structure and innovation and its implications for antitrust enforcement. A focus is on the significance of the inverted-U result in dynamic markets identified in research by Philippe Aghion, Peter Howitt, and their co-authors. We note that these results do not apply directly to mergers. A merger creates a negative externality by eliminating the incentive of each merging party to invest in an innovation that takes sales from the other party. However, mergers also can create a positive externality for innovations that expand the merged firm’s demand or accelerate discovery. We conclude that the net effects for innovation from mergers and from the acquisition or maintenance of monopoly power depend importantly on the extent to which mergers or monopoly power increase existing profits that are jeopardized by innovation.

Regulating Big Tech: Lessons From the FTC’s Do Not Call Rule

Regulating Big Tech: Lessons From the FTC’s Do Not Call Rule

 

 

William E. Kovacic

George Washington University - Law School; King's College London - The Dickson Poon School of Law

David A. Hyman

Georgetown University Law Center

 

Abstract

Big Tech (Amazon, Apple, Facebook, and Google) is under regulatory assault. Cases have been brought against each of these companies in multiple countries around the world, but there is an emerging consensus that more needs to be done – most likely in the form of ex ante regulation that prescribes rules of conduct for dominant information platforms. The European Union and the United Kingdom are well on the way to establishing such frameworks, and the United States appears poised to undertake similar measures in the coming years. Most of the debate has focused on the case for ex ante regulation of Big Tech, with much less attention to the complexities of developing and implementing such regulation.

This is not the first time that regulators have sought to use ex ante regulation to govern a technologically dynamic sector of the economy. In 2003, the U.S. Federal Trade Commission (FTC) promulgated its Do-Not-Call (DNC) Rule, which allows individuals to block unsolicited commercial telephone calls by enrolling in a national registry. The DNC Rule provides a useful case study of the complexities of developing and implementing ex ante regulation of a dynamic industry in the face of substantial legal, technological, and political risks. We identify a series of lessons for those now seeking to use similar strategies to regulate Big Tech.

Big Data, Little Chance of Success: Why Precedent Does not Support Anti-Data Theories of Harm

Big Data, Little Chance of Success: Why Precedent Does not Support Anti-Data Theories of Harm

 

 

Kristen O'Shaughnessy

 

D. Daniel Sokol

USC Gould School of Law; USC Marshall School of Business

Jaclyn Phillips

 

Nathaniel Thomas Swire

 

Abstract

As the digital economy has matured, “Big Data”— extremely large datasets that require sophisticated tools to analyze — has enabled extraordinary innovation, creating a number of benefits, including free products and greater efficiencies. Precisely because Big Data is such a powerful tool, though, scholars, governments, and litigants have called attention to what they view as its potential to harm both competition and consumers. In this article, we explore the advances enabled by Big Data, its competitive implications, and why applying an expansive interpretation of the antitrust laws regarding single firm conduct to Big Data would be out of step with legal precedent and sound economics.

From Divergence to Convergence: The Role of Intermediaries in Developing Competition Laws in ASEAN

From Divergence to Convergence: The Role of Intermediaries in Developing Competition Laws in ASEAN

 

 

Wendy Ng

University of Melbourne - Law School

 

Abstract

Despite the diversity of contexts and circumstances in which competition laws are developed and exist, many countries have enacted competition laws that are broadly similar. To learn more about the dynamics shaping the development of competition law at the national, regional, and international levels, this article investigates the development of competition law in the Association of Southeast Asian Nations (ASEAN) region, a region whose competition laws remain underexplored. This article undertakes a case study on the drafting of competition law in the ASEAN member states with the most recently drafted and/or enacted new comprehensive competition laws, that being Brunei Darussalam, Cambodia, Lao PDR, Myanmar, and the Philippines. It finds that, while there were differences in the processes of drafting and enacting competition law in these countries as well as in their local contexts, their competition laws are similar in many respects. The case study also finds that intermediaries facilitated the processes of translation and adaptation that occurred in developing competition law in these ASEAN member states. This article argues that the important role that intermediaries played in developing competition laws was a key reason for the broad convergence of these competition laws across their diverse local settings.

Don't Abolish Employee Noncompete Agreements

Don't Abolish Employee Noncompete Agreements

 

Alan J. Meese

William & Mary Law School

 

Abstract

For over three centuries, Anglo-American courts have assessed employee noncompete agreements under a Rule of Reason. Despite longstanding precedent, some now advocate banning all such agreements. These advocates contend that employers use superior bargaining power to impose such “contracts of adhesion,” preventing employees from selling their labor to the highest bidder and reducing wages. Abolitionists also contend that such agreements cannot produce cognizable benefits and that employers could achieve any benefits via less restrictive alternatives, without limiting employee autonomy.

This article critiques the Abolitionist position. Arguments for banning noncompete agreements echo hostile critiques of other nonstandard contracts during Antitrust Law’s “inhospitality era.” These critiques induced courts and agencies to condemn various nonstandard agreements. Employee noncompete agreements escaped such condemnation because they were governed by state contract law.

The article recounts how Transaction Cost Economics (“TCE”), undermined these critiques. TCE demonstrated that nonstandard agreements, such as exclusive territories, could overcome market failures by preventing dealers from free riding on each other’s promotional efforts. TCE also concluded that such agreements were voluntary integration, unrelated to market power. These scientific developments induced courts to abandon their hostility to nonstandard contracts, and nearly all such agreements properly withstand rule of reason scrutiny.

TCE also undermines the case against employee noncompete agreements. Most notably, TCE predicts that most such agreements are voluntary methods of ensuring that employers capture the benefits of investments in employee training and trade secrets, by deterring rival firms from free riding on such investments and bidding away employees. Application of TCE also rebuts claims that less restrictive alternatives will achieve the same objectives as noncompete agreements.

Finally, TCE undermines contentions that such agreements injure employees by preventing them from receiving lucrative bids from competing employers. This account of harm treats hypothesized bids and resulting imagined (higher) wages as an exogenous baseline against which to measure the impact of such agreements. According to TCE, however, such bids are not exogenous, but instead often occur because noncompete agreements incentivize employers to make investments that increase employee productivity. Banning such agreements will thus reduce employee productivity, eliminating the incentive for rivals to bid for employees. In such cases, claims that noncompete agreements reduce wages invoke an illusory baseline of bids that would not occur but for the enforcement of such agreements.

Empirical evidence confirms TCE’s predictions. Many such agreements apparently arise in unconcentrated markets. Most are disclosed in advance, and robust enforcement induces additional employee training. Finally, employees who receive pre-employment notice of such provisions earn higher wages than similarly situated employees not bound by such agreements. Thus, many such agreements appear to be voluntary means of protecting investments in employee training, improving employee productivity, and increasing GDP.

This is not to say that all employee noncompete agreements produce significant benefits. Some employers decline to disclose such contracts until after employees join the firm. Such agreements apparently depress wages without producing benefits. Moreover, some such agreements could raise rivals’ costs and enhance employers’ market power.

Neither potential impact justifies abolition. States or the FTC could encourage or require pre-contractual disclosure, leaving employers and employees free to adopt provisions that increase their joint welfare. Moreover, even the inventors of raising rivals’ costs theory opined that most markets are not susceptible to such a strategy. Abolitionists have made no effort to establish that employee non-compete agreements usually arise in markets where such a strategy is possible. The rare prospect that parties may employ fully disclosed agreements to pursue such a strategy does not justify abolishing all such agreements.

Indeed, banning all such agreements may have a disparate impact on small, labor-intensive firms, by discouraging optimal investments in employee training. This potential impact may help explain labor union support for abolishing such agreements. Unionized firms predictably adopt capital-intensive production processes in response to collective bargaining and resulting noncompetitive wages. Laws that disadvantage non-union, labor-intensive firms will enhance the demand for the output of unionized firms, increasing the demand for unionized labor. Banning noncompete agreements will thus sometimes boost unionized workers at the expense of their nonunion counterparts.

Antitrust and Trademark Settlements

Antitrust and Trademark Settlements

 

 

C. Scott Hemphill

New York University School of Law

Erik Hovenkamp

University of Southern California School of Law

 

Abstract

In today’s digital economy, online competitive advertising plays a central role in informing consumers about low prices and other desirable product features. Accordingly, rivals have a strong incentive and opportunity to place anticompetitive limits on the flow of information. They do so by reaching collusive agreements in which the firms avoid targeting one another with ads. Ordinarily, such an arrangement might be regarded as a straightforward antitrust violation. However, these deals take the form of settlements of trademark litigation, raising the possibility that the restraints might be justified by trademark law. There is little case law or scholarship identifying when settlements of trademark litigation run afoul of the antitrust laws.

This Article is an effort to fill that gap. We explain how the standard developed in the Supreme Court’s Actavis decision, a watershed ruling about patent settlements, can be adapted and applied to trademark cases. We articulate how courts can identify anticompetitive settlements without having to evaluate the merits of the underlying trademark infringement claims. Settlements imposing broad restraints on competitive targeted advertising may raise significant antitrust concerns that are unlikely to arise in run-of-the-mill settlements that merely restrain what marks a firm can attach to its product. We also consider and evaluate a number of possible procompetitive justifications for restrictive trademark settlements. Our analysis uncovers substantial errors in the first appellate decision addressing these restraints.

Antitrust Interoperability Remedies

Antitrust Interoperability Remedies

 

 

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

 

Abstract

Compelled interoperability can be a useful judicial or statutory remedy for dominant firms, including digital platforms with significant market power in a product or service. They can address competition concerns without interfering unnecessarily with the structures that make digital platforms attractive and that have contributed so much to economic growth.
Given the wide variety of structures and business models for big tech, “interoperability” must be defined flexibly. Approaches to interoperability begin with the premise that anything that can be organized within a firm can also be organized in a market, and vice-versa. The key to a good interoperability solution is to permit individual assets to function competitively where that is preferable, but collaboratively when collaboration produces better results. Interoperability can include everything from “dynamic” interoperability that requires real time sharing of data and operations, to “static” interoperability which requires portability but not necessarily real time interactions. Also included are the compelled sharing of intellectual property or other productive assets, or creation of broader and more competitive management within the firm.
Designing such remedies requires identification of the particular structures or practices that are making these markets less competitive than they might be. Interoperability is not the best remedy in all situations, nor even for all of those that involve digital platforms. For example, it is rarely the best remedy for non-dominant assets, even those that are sold on two-sided digital markets.
Tested by these criteria, the proposed American Innovation and Choice Online Act falls short. Without assessing a market power requirement, it would compel interoperability of ordinary competitive products, and in ways that are likely to produce significant private and enforcement costs and to encourage substantial free riding without offering any competitive benefit.

Bespoke Antitrust

Bespoke Antitrust

 

 

Harry First

New York University School of Law

Spencer Weber Waller

Loyola University Chicago School of Law

 

Abstract

Antitrust laws in the United States, and competition rules in Europe, are usually set out in statutes of general applicability, written in broad, almost constitutional form. This is a “one size fits all” statutory style. There is another possible style of antitrust, which we call “bespoke antitrust.” It consists of specialized rules customized for the industry, for a particular plaintiff or defendant, or for the practice in question.

In this article we describe the under-appreciated trend toward bespoke antitrust law. We think that this trend shows up in case law, enforcement agency practice, and regulatory alternatives. We also look at existing and new proposals to create more bespoke antitrust rules and institutions to deal with the challenges of digital platforms and other dominant firm in the tech space. This, we believe, is a particularly important example of the trend toward more bespoke rules for competition law.

We conclude with a cautious endorsement and a caveat. Bespoke antitrust is expensive in many ways and can threaten the rule of law by carving out exemptions if society (or the beneficiaries) are willing to pay the price. Nevertheless, there are important areas where targeted efforts are worth the price. Custom-tailoring has its rewards.

Information vs Competition: How Platform Design Affects Profits and Surplus

Information vs Competition: How Platform Design Affects Profits and Surplus

 

 

Amedeo Piolatto

Autonomous University of Barcelona; Barcelona Economics Institute (IEB); Barcelona Graduate School of Economics (Barcelona GSE)

Florian Schuett

Tilburg Law and Economics Center (TILEC); Tilburg University - Tilburg University School of Economics and Management

 

Abstract

We study the design of online platforms that aggregate information and facilitate transactions. Two different designs can be observed in the market: revealing platforms that disclose the identity of transaction partners (e.g. Booking) and anonymous platforms that do not (e.g. Hotwire). To analyse the implications of this design choice for profits and surplus, we develop a model in which consumers differ in their location as well as their preferred product variety. Sellers offer their products for sale both directly (‘offline’) and indirectly via the platform (‘online’) but are unable to credibly disclose the product variety they offer when selling offline. The model gives rise to a novel trade-off associated with the anonymous platform design: offline, consumers observe location but not variety; online, they observe variety but not location. While the revealing design leads to more informed consumers and better matches, the anonymous design allows sellers to price discriminate and introduces competition between sellers whose markets would otherwise be segmented. We show that the comparison between the designs depends crucially on the relative importance of information about location vis-`a-vis information about variety. For an intermediate range, the anonymous design outperforms the revealing design in terms of both profits and welfare.

The Slogans and Goals of Antitrust Law

The Slogans and Goals of Antitrust Law

 

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

 

Abstract

This is a comparative and historical examination of the slogans and goals most advocated for antitrust law today – namely, that antitrust should be concerned with “bigness,” that it should intervene when actions undermine the “competitive process,” or that it should be concerned about promoting some conception of economic welfare.

“Bigness” as an antitrust concern targets firms based on absolute size rather than share of a market, as antitrust traditionally has done. The bigness approach entails that antitrust cannot be concerned about low prices, or the welfare of consumers and labor. Nondominant firms could not sustain very high prices or cause significant reductions in market output. Concerns about bigness as such invariably translate into protection of small business, or of firms dedicated to older distribution methods of technologies. These firms can be injured by even nondominant rivals who have lower costs or more innovative supply.

The most important advantage of an antitrust policy of protecting the “competitive process” is the phrase’s rhetorical appeal. It invokes a classical liberal bias that sees process rather than substance as the key to good public decision making. However, classical liberalism reaches that point by beginning with a few bedrock substantive starting points, including protection of contract, property rights, and due process. No equivalent bedrock exists for the “competitive process.” As a result, people from the right and the left embrace it, and it cannot produce useful tools for decision making about competition issues. It operates as a slogan.

The history of antitrust welfare tests is rooted in neoclassical economics. Today, they are dominated by a “welfare tradeoff” model developed in the 1960s and a consumer welfare model, drawn mainly from antitrust’s statutory language and legislative history. Robert Bork did these tests severe damage by adopting a welfare tradeoff model and naming it “consumer welfare.” The confusion that ensued has corrupted the debate over antitrust goals ever since. It explains at least part of the reason that so many people today regard consumer welfare tests as toothless, identified with higher margins and lack of competitiveness.

Finally, while many speak of “consumer welfare” as an antitrust goal, “welfare” is rarely what they measure. Rather, they measure – or better, estimate – changes in output or changes in price. The best statement of a welfare test for antitrust is a policy of encouraging markets to produce maximum sustainable output.