Tuesday, September 23, 2008

Collusion in US Agriculture - DOJ Investigates Potential Cartels

Posted by D. Daniel Sokol

The WSJ has an article in today's paper on a DOJ investigation into egg producers and California tomato processors.  Collusion in agriculture is not surprising given high concentration in the industry and low levels of substitutability of products, among other reasons. 

  One big takeaway of agriculture issues in antitrust is that competition policy affects the way firms in agricultural production behave as much as how they relate to other sectors in the economy, and may prove to be an important tool in helping develop a dynamic agricultural sector.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

The Antitrust Economics (and Law) of Surcharging Credit Card Transactions

Posted by D. Daniel Sokol

Steven Semeraro, Thomas Jefferson School of Law, offers some thoughts on The Antitrust Economics (and Law) of Surcharging Credit Card Transactions.

ABSTRACT: When a customer uses a credit card, the merchant pays a small percentage of the purchase price to the bank that issued the card. This cost of card acceptance, known as the interchange fee, adds up to big money . . . really big. This year, the credit card companies anticipate that interchange fees will total $48 billion, an increase of nearly 300% since 2001. Merchants can do little to influence these fees, because credit cards are critical to their businesses and the systems' rules prohibit surcharging.

In recent years, commentators with growing levels of confidence have suggested that this anticompetitive rumble could be quelled if merchants had the power to surcharge card transactions. And now, fed up with the astonishing increases in interchange fees, merchants have filed more than 50 antitrust suits (now consolidated) against the credit card companies challenging the rules prohibiting surcharging and seeking the power to do it.

This Article contends that permitting surcharging would likely do more harm than good. Under well established economic principles, charging merchants more than necessary to cover the cost of providing card-acceptance services can actually enable consumers to internalize all of the benefits (those flowing to both consumers and merchants) of card use. Just as newspapers efficiently charge readers much less than the cost of producing and delivering the morning paper, and advertisers pay much more than the cost of placing an advertisement, efficient credit card pricing requires that merchants pay more than the direct cost of service, and cardholders pay less. In such a two-sided market, shielding cardholders from merchant acceptance costs through rules prohibiting surcharging serves the pro-competitive purpose of facilitating efficient pricing.

Today, unfortunately, card systems with market power go too far and charge merchants an additional, anticompetitive increment, above what is necessary to an efficient pricing policy. Card issuers may then retain some revenue as supra-competitive profit and wastefully compete some away in pursuit of highly profitable cardholders. Although surcharging potentially could combat this market power, it would be an uncertain and risky response, because merchants could not precisely tailor their schemes to undo only the anticompetitive overcharge. Moreover, retailers in competitive markets would find surcharging difficult because of the costs, particularly in terms of customer resistance. Merchants with market power probably could institute surcharges, but would be unlikely to channel all of the savings to their customers. In sum, the competitive benefits of permitting surcharging are more uncertain, and the losses in terms of consumer welfare more likely, than commentators have suggested. Whether consumers would benefit from the resulting disruption to the current market equilibrium would be, at best, anybody's guess.

This Article proposes an alternative, less risky response that would focus directly on card system market power by relaxing the rule that requires merchants to accept cards from every issuer on the network (the "honor-all-cards" rule). Today, large banks issuing Visa and MasterCard cards effectively set their interchange fees collectively. By forcing these banks to compete for merchants, as American Express and Discover do now, this approach would stimulate competition and move card-acceptance costs toward the efficient level, without a significant risk of inefficiently disrupting the market.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Defining Product Markets in the UK Grocery Industry

Posted by D. Daniel Sokol

Kate Collyer (UK Competition Commission) and Andrew Taylor (UK Competition Commission) provide some insights on Defining Product Markets in the UK Grocery Industry.

ABSTRACT: On April 30, 2008, the UK Competition Commission published the final report of its two year investigation into the supply of groceries in the UK. This article gives a UK perspective on some of the issues covered in the recent Whole Foods decision by the U.S. Court of Appeals for the District of Columbia. It draws out the key market definition findings in the CC’s investigation, with a particular focus on the CC’s decisions and analysis with respect to those grocery retailers offering a somewhat differentiated product from the UK’s mainstream grocery retailers.

The CC’s investigation into the UK groceries sector was a market investigation under the provisions of the Enterprise Act 2002, which requires the CC to decide under s.134(1) whether “any feature … of each relevant market prevents, restricts, or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK.” Where the CC identifies such a feature there is said to be an ‘adverse effect on competition’, and the CC then decides on the action, if any, that should be taken by itself or by others to remedy, mitigate, or prevent the AEC.

Defining the product and geographic markets in which grocery stores compete was a key building block for the CC’s groceries market investigation, providing the framework for the CC’s analysis of competition among grocery retailers. The CC’s guidelines state that “the Commission does not regard market definition as an end in itself, but rather as a framework within which to analyze the effects of market features.” Nevertheless, in this case the CC’s market definition findings perhaps have greater significance in that they are likely to influence future Office of Fair Trading inquiries in the sector.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Monday, September 22, 2008

The Audit Industry: World's Weakest Oligopoly?

Posted by D. Daniel Sokol

Bernard Asher of the American Antitrust Institute has written a piece on The Audit Industry: World's Weakest Oligopoly?

ABSTRACT: The world’s audit oligopoly is composed of four accounting firms: PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte Touche Komatsu (the Big 4). These firms are in a strong position in that they audit the financial statements of nearly all the global public companies in the world and, arguably, are the only audit firms able to do so. They are huge, privately-owned, international networks with robust revenues, vast resources, and expertise. Yet they are heavily regulated by governments, and they are subject to massive lawsuits when investors and creditors suffer large losses due to fraud or error; these are their major weaknesses. Since the dual shocks of the collapse of Arthur Andersen (reducing the Big 5 to 4) and the enactment of stringent regulations by the U.S. Congress in 2002 in reaction to corporate accounting scandals, there is great concern in the financial community that another company in the oligopoly could be forced out of business, further reducing the choice of auditors for multinational corporations and causing disruptions in the marketplace.

This paper reviews the effects of concentration on competition in the market for audits of major multinational corporations, as well as the effects on audit fees, audit quality, and the regulatory environment. It observes that competition is far less intense than in earlier years and that regulatory authorities are reluctant to take severe disciplinary actions against audit firms, but that the industry remains vulnerable to legal challenge. Global public companies will continue to face limited choice of auditors until smaller competitors or new competitors can build viable networks and reputations for high quality audits. The paper examines barriers to market entry and comments on proposals to promote greater competition, including liability limitations. It also reports on anticompetitive practices of major accounting firms in the past and the need for regulatory authorities to maintain constant vigilance to avoid any recurrence. Finally, responding to the question posed in the title, the paper concludes that considering the industry’s market dominance, the relaxation of punitive actions by regulatory authorities and the availability of some forms of liability limitation, the audit industry may not be the ideal candidate for weakest oligopoly in the world.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Market Definition in Grocery Retailing: The Whole Foods Case

Posted by D. Daniel Sokol

Jgs_3 Jordi Gual of the University of Navarra - IESE Business School and Sandra Jódar-Rosell University of Toulouse Economics (grad student) provide a European view on Market Definition in Grocery Retailing: The Whole Foods Case.

ABSTRACT: As in many other antitrust cases, the delineation of the relevant product market was the critical issue in the Whole Foods and Wild Oats merger. Setting the market boundaries containing the set of products in direct competition with those of the merging parties is a very difficult task in the presence of product differentiation. The varieties produced by each of the firms differ in several dimensions.

Two varieties at the opposite extremes of the differentiation dimension may end up as poor substitutes for each other. In practice, it is very difficult to draw a line in the middle of these two extremes that objectively separates the two product markets.

In an attempt to offer an objective criterion for market definition, the Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission (“Guidelines”) state that the antitrust agencies must delineate the product market as a group of products such that, if produced by a hypothetical profit-maximizing monopolist, would be able to profitably impose at least a small but significant and nontransitory increase in price. This approach has been known as the SSNIP test. Although theoretically appealing, in practice a proper assessment of the SSNIP test would be equivalent to a full quantitative evaluation of the merger.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Price Squeeze: Lessons from the Telecom Italia Case

Posted by D. Daniel Sokol

A new article by Michele Polo (Professor of Economics, Bocconi University) discusses Price Squeeze: Lessons from the Telecom Italia Case.

ABSTRACT: This paper analyzes a price squeeze case in the provision of telecommunication services to the Italian Public Administration, in which Telecom Italia, the incumbent company, was condemned for bidding below costs. We develop the analysis of the case highlighting the possible anticompetitive story and the alternative competitive explanation. We then construct a quantitative imputation test to verify the alleged anticompetitive behavior. The methodological issues and the assumptions needed to implement the test are discussed in detail, showing their link to a precise test of the anticompetitive story. We discuss the reasons why the Antitrust Authority and our views diverge over the evaluation of Telecom Italia bidding. The role of judicial review in cases with complex economic arguments is discussed.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Contemplating the Future: Personal Criminal Sanctions for Infringements of EC Competition Law

Posted by D. Daniel Sokol

A new piece by Peter Whelan of the British Institute of International and Comparative Law is Contemplating the Future: Personal Criminal Sanctions for Infringements of EC Competition Law.

ABSTRACT: For hard-core cartels, criminal sanctions are not only necessary, in the sense that they help ensure optimal deterrence, they are also appropriate, especially given the secretive and typically dishonest nature of this particular activity. Criminal punishment should not extend however to the enforcement of Article 82 EC or to the 'non-hard-core' agreements under Article 81. In these cases only administrative and/or civil/private punishment should be imposed. In terms of law alone, the EC Treaty framework establishing the EC competition regime is arguably theoretically capable of providing a legal basis for EC criminalisation. Reasons can also be advanced as to why criminal sanctions should in practice be provided and/or imposed at that level. But any effort at EC criminalisation would involve significant legal and political challenges, and perhaps popular censure. It is principally for this pragmatic reason that criminalisation is best suited to national level, at least for the foreseeable future.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Sunday, September 21, 2008

Association of Competition Economics Annual Meeting

Posted by D. Daniel Sokol

The Association of Competition Economics has set the date for its annual meeting (this year in lovely Budapest) from Thursday November 27 till Friday November 28.

(Preliminary) Program
Thursday, November 27th -

12. 30 – 14.00 Registration of participants

14. 00 - 14.30 Welcome address

14.30-16.00 Parallel Sessions

Panel I : TomTom-Tele Atlas
Chairman: Amelia Fletcher (OFT, GB).
Speakers:
- Raphaël De Coninck (European Commission - UE)
- David Sevy (LECG - GB)
- Matthew Johnson (Oxera)
- Patrick Rey (TSE, IDEI, Fr)

Panel II : BskyB –ITV
Chairman: Lars Sorgard (Norvegian Competition Authority and Norwegian School
of Economics, Norway)
Speakers :
- Nicola Mazzarotto (CC - GB)
- Zoltan Biro (Frontier - GB)
- Nathalie Sonnac (Crest-LEI, Fr)

Panel III : Toys
Chairman: Alena Zemplinerova (CERGE, Prague, TR))
Speakers:
- Nadine Mouy (CC - Fr)
- Antoine Chapsal (Mapp, Fr)
- Marie-Laure Allain (Ecole Polytechnique, Fr)

16.00-16.30 Coffee Break

16.30-18.00 Parallel sessions

Panel IV : Google - Double Click
Chairman : Konrad Stahl (University of Mannheim, D)
Speakers :
- Penelope Papandropoulos (DG Comp, EU)
- Andrea Lofaro (RBB, GB)
- Janus Ordover (TBC, New York University, USA)

Panel V: Direct Energie
Chairman: Mark Willams (NERA, GB and B)
Speakers :
- Simon Genevaz (Conseil de la concurrence, Fr)
- David Spector (MAPP, Fr)
- Claude Crampes (TSE, IDEI, Fr)

Panel VI : Mondi Dunapack
Chairman : Laszlo Szakadat (TBC, Hungarian Competition Authority)
Speakers :
- Gergely Csorba (Hungarian Competition Authority, H)
- Dan Gore (RBB, GB)
- Gabor Kezdi (Central European University, H)

20.00 - Dinner

Friday, November 28th -

9.00-10.30 Parallel Sessions
Panel VII : Lemvigh-Müller / Brdr. A & O Johansen
Chairman: Svend Albæk (DG Comp, EC, EU)
Speakers :
- Søren Gaard (Danish Competition Authority)
- Peter Møllgaard (Copenhagen Business School, DK)
- Hans Keiding, (University of Copenhagen)

Panel VIII : PT/ Sonaecom.
Chairman : Natalia Fabra (University Carlos III, Madrid, Sp)
Speakers :
- G. Federico (CRAI, Barcelona and London, Sp and UK)
- F. Jimenez (NERA, Madrid, Sp)
- S. Hoernig (Univ Nova de Lisboa, Portugal)
- J. Azevedo (OECD, Paris, Fr)

Panel IX : INEOS – KERLING
Chairman : Marc Ivaldi (TSE, IDEI, Fr)
- Ian Small (CRAI, Uk)
- Miguel de la Mano (CET, DG Comp)
- Frank Verboven (UK Leuven, B)

10.30-11.00 Coffee Break

11.00-12.15 Round Table on “Economic evidence in competition policy cases” :
Chairman : Massimo Motta (University of Bologna and EUI, Italy)
- John Fingleton (OFT, UK)
- Nadia Calvino (DG Comp, EU)
- Frédéric Jenny (Cour de Cassation, Fr)

12.15 –12.45 Information on ACE

12.45 - … Lunch

End of the ACE 2008 Conference

September 21, 2008 | Permalink | Comments (0) | TrackBack (0)

Saturday, September 20, 2008

Settlements in Cartel Cases

Posted by D. Daniel Sokol

Neelie Kroes, European Commissioner for Competition Policy, gave a speech on Settlements in Cartel Cases at the annual IBA antitrust meeting in Fiesole.

 

September 20, 2008 | Permalink | Comments (0) | TrackBack (0)

Friday, September 19, 2008

FTC vs. Whole Foods: Which Standards? Which Substitutes?

Posted by D. Daniel Sokol

Brennan110 Tim Brennan of the University of Maryland-Baltimore Department of Economics has written FTC vs. Whole Foods: Which Standards? Which Substitutes?

ABSTRACT: If email traffic over the American Bar Association’s Antitrust Section “conversation” list is any indication, the recent 2-1 decision by a panel of the U.S. Court of Appeals for the DC Circuit Court in FTC v. Whole Foods is the hottest current topic, at least in the U.S. corner of the competition policy community. In that decision, the DC Circuit reversed a district court’s denial of the U.S. Federal Trade Commission’s (“FTC’s”) request to enjoin Whole Foods’ acquisition of Wild Oats. The FTC provided evidence and expert testimony supporting a claim that these were the two largest chains of “premium, natural, and organic supermarkets” (“PNOS”). The parties contended that the firms would lack market power after the merger because consumers would respond to higher prices by going to conventional grocery stores.

The decision has inspired so much comment because of the quantity of issues it raises. In this article, I briefly discuss some legal issues, then turn to aspects of market definition, and conclude with observations relating to recent discussions on the role of distributional considerations in merger assessment.

September 19, 2008 | Permalink | Comments (0) | TrackBack (0)

The Relevant Market: A Concept Still in Search of a Definition

Posted by D. Daniel Sokol

Adriaan ten Kate and Gunnar Niels (Oxera) have penned The Relevant Market: A Concept Still in Search of a Definition.

ABSTRACT: We identify some shortcomings of the hypothetical monopolist definition (HMD) of the relevant market as set out in the 1992 U.S. Merger Guidelines and followed by competition regimes worldwide, and propose a rephrased version to give the HMD a greater scientific rigor. It is shown that market boundaries under the HMD depend significantly on supply-related factors (such as pre-merger competitive interaction and the shape of cost functions), contrary to the claim in the Guidelines that market definition focuses solely on demand substitution factors. We formulate two alternative definitions of relevant market that build on the same logic as the HMD but do depend only on demand factors.

September 19, 2008 | Permalink | Comments (0) | TrackBack (0)

Thursday, September 18, 2008

From Competition to Regulation: New Zealand Telecommunications Sector Performance 1987-2007

Posted by D. Daniel Sokol

Bronwyn_howell_1 Bronwyn E. Howell, NZ Institute for the Study of Competition and Regulation Inc. and Victoria Management School, Victoria University of Wellington provides an overview of what I believe is one of the world's most interesting experiments in the area of telecom competition in her paper From Competition to Regulation: New Zealand Telecommunications Sector Performance 1987-2007.

ABSTRACT: Using an efficiency-based framework, this paper analyses the performance of New Zealand's telecommunications sector under competition law-based sector governance (the period from 1987 to 2001) and under industry-specific regulation (2001 to 2007). The framework considers the productive, allocative and dynamic efficiency effects of each regime, and the nature of the strategic interaction of sector participants.

The analysis reveals that substantial gains in all forms of efficiency were achieved during the 1990s, both compared to historic New Zealand and contemporary OECD benchmarks. Under industry-specific regulation, however, transfers to consumers appear to have reduced, transaction costs have increased and delays are being incurred in the deployment of new applications and technologies relative to the competition law regime as participants engage in strategic gaming with politicians and the regulator and respond predictably to the range of incentives offered under the regulatory regime. The paper concludes that on balance in the New Zealand circumstances, the regime based predominantly upon competition law appears to have outperformed the industry-specific regulatory regime, albeit due in large part to sector participant interaction shaped by contractual obligations imposed by the government on the incumbent which have prevailed unchanged under both regimes.

September 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach

Posted by D. Daniel Sokol

Thomas Borek, Eidgenossische Technische Hochschule Zurich (ETHZ) - Department of Mathematics, Stefan Buehler, University of St. Gallen - Department of Economics, and Armin Schmutzler, University of Zurich - Socioeconomic Institute (SOI) provide Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach.

ABSTRACT: This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions.

September 18, 2008 | Permalink | Comments (0) | TrackBack (0)

The Financial Crisis and Its Effects on Antitrust

Posted by D. Daniel Sokol

We are in the worst financial crisis since the Great Depression.  Even the Wall Street Journal has come around to this conclusion.  What does this mean for antitrust?  In terms of mergers, certainly the failing firm defense comes to mind for the acquisition of a number of our financial institutions.  However, I ask the question in the much larger sense of what does this systemic shock mean for antitrust policy as we know it.  Here is my prognosis (of which I would gladly eat my hat if I am proven wrong given how gloomy it is) by events as they continue to unfold: 

  1. We are likely to see a return to a more populist based antitrust as policy-makers, Congress and the general public's new-found general distrust for markets permeates into the antitrust realm. 
  2. Most efforts to curb bad government interventions in the economy, whether new or existing, through competition advocacy will fail.  Expect to see many non-financial bailouts.  For example, the US auto industry is certainly going to use this crisis to push for a bailout even though its problems are of its own making.
  3. Antitrust decisions will take on a more political nature, which will take antitrust away from the more bureaucratic, efficiency based system based on economic reasoning that it has become.
  4. It will be much tougher to sell the idea of antitrust and of a larger competition policy abroad, particularly to China and India.
  5. Countries will erect more non-antitrust restrictions to cross country mergers, thereby increasing the cost of business.   

September 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Northwestern Law School Conference on Networks in Communications

Posted by D. Daniel Sokol

I am off today to Northwestern, where I will be participating in a Research Roundtable on Networks in Telecommunications at Northwestern University Law School's Searle Center.  The agenda and list of participants is available here.

September 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 17, 2008

Varian in Defense of Google-Yahoo

Posted by D. Daniel Sokol

Hal Varian (Berkeley Economics) who is on leave as Google's Chief Economist counters some negative commentary on the competitive effects of the proposed deal on the Google Public Policy Blog.

September 17, 2008 | Permalink | Comments (0) | TrackBack (0)

Collusion and Research Joint Ventures

Posted by D. Daniel Sokol

Kaz Miyagiwa, Osaka University - Institute of Social and Economic Research (ISER) has some thoughts on Collusion and Research Joint Ventures.

ABSTRACT: We examine whether cooperation in R&D leads to product market collusion. Suppose that firms engage in a stochastic R&D race while maintaining the collusive equilibrium in a repeated-game framework. Innovation under competitive R&D creates inter-firm asymmetries, which destabilizes the collusive equilibrium. Innovation sharing through cooperative R&D preserves symmetries, thereby facilitating collusion. Sharing an efficient technology also increases industry profit, which contributes to the collusion stability but also raises social welfare. Interestingly, a welfare improvement is less likely if innovation leads to a large cost reduction. The effect of licensing under competition R&D is also examined.

September 17, 2008 | Permalink | Comments (0) | TrackBack (0)

House Committee on Transportation and Infrastructure Hearing on the Effects of Proposed Arrangement Between DHL and UPS on Competition, Customer Service, and Employment

Posted by D. Daniel Sokol

For those who want to see local parochialism in action on competition matters, check out the House Committee on Transportation and Infrastructure Hearing on the Effects of Proposed Arrangement Between DHL and UPS on Competition, Customer Service, and Employment.  The written testimony is available on the web.  This is not a 3 to 2 merger as opponents portray it.  Indeed, it is not a merger at all, but that is a different story.  Have people forgotten that the US Postal Service also competes in this market as well (and does so in ways that distorts competition according to a recent FTC study)?

September 17, 2008 | Permalink | Comments (0) | TrackBack (0)

Collusion in Repeated Procurement Auction: A Study of a Paving Market in Japan

Posted by D. Daniel Sokol

Rieko Ishii of the Institute of Social and Economic Research of Osaka University has undertaken Collusion in Repeated Procurement Auction: A Study of a Paving Market in Japan.

ABSTRACT: We examine auction data to determine if bid rigging presents in procurement auctions for paving works in Ibaraki City, Osaka, Japan. We first show that sporadic bidding wars are caused by the participation of potential outsiders. Assuming that the ring is all-inclusive if the auction is not the bidding war, we estimate the scheme by which the ring allocates a win to its members. It is found that the ring tends to select a bidder whose winless period is long and whose winning amount in the past is small relative to other bidders.

September 17, 2008 | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 16, 2008

The Petroleum Industry, Merger Enforcement, and the Federal Trade Commission

Posted by D. Daniel Sokol

Diana L. Moss of the American Antitrust Institute writes on The Petroleum Industry, Merger Enforcement, and the Federal Trade Commission.

ABSTRACT: This article attempts to provide a context for understanding the complex industry landscape against which joint ventures and mergers are evaluated and almost always approved by the FTC. It argues that fundamental changes in the domestic petroleum sector over the last 20 years should factor importantly into antitrust decisionmaking. It is not clear that the FTC's predictable approach has considered many of these changes and subtleties, so the article suggests ways in which that objective can be accomplished. The following section pieces together a picture of the domestic refining-marketing industry that should ideally inform all analysis of refining and marketing mergers. That picture is characterized by: (1) rapid, large-scale consolidation, (2) changes in refining technology and scale and contraction of wholesale marketing capacity, and (3) empirical economic analysis that identifies market power as a central concern. The next section offers thoughts on what is potentially missing from the analysis of refining and marketing mergers and the final section concludes.

September 16, 2008 | Permalink | Comments (0) | TrackBack (0)