Antitrust & Competition Policy Blog

Limiting Anti-Competitive Government Interventions that Benefit Special Interests

Posted by D. Daniel Sokol

D. Daniel Sokol of the University of Florida Levin College of Law (i.e., your blog editor) has a new working paper, Limiting Anti-Competitive Government Interventions that Benefit Special Interests.  It is my last foray for a while into international antitrust issues. Presently, I am finishing work on three other projects, the most exciting of which addresses antitrust decision-making and which utilizes both the survey I had many of you take last summer plus follow up qualitative interviews of Chambers ranked antitrust practitioners across the US, which I am finishing up now.  In case you are Chambers ranked in antitrust and have put off talking to me, send me an email to schedule an appointment.  I promise that the 30 minute session will be painless. 

ABSTRACT: When government regulates, it may either intentionally or unintentionally generate restraints that reduce competition (“public restraints”). Public restraints allow a business to cloak its action in government authority and to immunize it from antitrust. Private businesses may misuse the government’s grant of antitrust immunity to facilitate behavior that benefits businesses at consumers’ expense. One way is by obtaining government grants of immunity from antitrust scrutiny. This Article offers a new contribution to the extensive literature on the globalization of antitrust. The present Article focuses both on the processes of creating public restraints, as well as upon the negative impacts of these restraints. Government can exempt a company from antitrust regulation, which allows the firm unbridled discretion to monopolize and harm consumers.

The focus of this Article, the issue of government intervention in the economy and its competitive impacts, has taken on renewed importance as the global financial crisis has led countries to provide various benefits to favored companies, which may distort competition. Distorting competition may keep the world in recession longer, as countries may retaliate with new distortions of their own, creating a downward spiral for the global economy. Thus, local “solutions” may cause international problems, and require international resolutions.

This Article addresses the important domestic and international institutional dynamics of how to reduce such anti-competitive immunities. It then provides a theoretical framework to identify potential domestic and international institutional responses to public restraints and the costs and benefits of these responses. The institutional framework developed in this Article proposes both substantive policies and institutional structures that can undertake these policies. The framework builds on both new institutional economics and international organization literatures, while recognizing the difficult limitations in design and capacity that existing institutions face. Part I of this Article explores the causes and effects of public restraints. Part II analyzes the potential institutional choices to address public restraints. In Part III, this Article undertakes a case study of the current inadequacies of existing institutional solutions to the problem of government restraints. Part III then suggests a set of reforms to correct for the existing institutional shortcomings. The Conclusion suggests that a modified WTO is the least bad alternative to address international antitrust public restraints.

Reformulating Antitrust Rules to Safeguard Societal Wealth

Posted by D. Daniel Sokol

Alan Devlin, and Bruno L. Peixoto, Lanna Peixoto Advogados, The Brazilian Institute for Economic Analysis of Law have a paper on Reformulating Antitrust Rules to Safeguard Societal Wealth.

ABSTRACT:Myopic application of the antitrust laws has produced two perverse effects: it has halted increases in aggregate social wealth and erroneously sanctioned business practices that cause significant societal welfare losses. Thus, current competition rules give rise to a society deprived of resources it would otherwise enjoy. Present antitrust rules may appear to be formulated with the well-being of capital-constrained consumers in mind, but such is not the case. This Article debunks the consumer welfare standard, the current antitrust lodestar. We show that the competition laws currently draw an unwarranted distinction between producer and consumer wealth, subordinating the former to the latter. They do so absent sound distributional reasons justifying the promotion of one form of wealth-generation over the other.

This Article shows that the consumer welfare standard does not accurately reflect principles of Rawlsian justice and may, in fact, result in highly imperfect and possibly unjust redistribution. We defend a monotheistic approach to antitrust law, extinguishing the artificial division of society in the distinct and opposed classes of consumers and producers. We favor an antitrust policy in which expanding society's aggregate welfare and efficiently allocating resources in production are the sole goals. We argue that even if significant wealth transfers from the bottom of the social pyramid to its top occur because of the novel standard, redistribution should occur more efficiently through enhanced private mechanisms aimed at sharing increased wealth. We show which, and how, antitrust rules should be reformulated to both sanction Kaldor-Hicks efficient transactions and block welfare-reducing practices. Finally, we argue that legal and practical objections to the adoption of a standard focused on sharing increased wealth are easily surmountable.

Antitrust Divergence and the Limits of Economics

Posted by D. Daniel Sokol

Alan Devlin and Michael S. Jacobs, DePaul University - College of Law have a forthcoming paper on Antitrust Divergence and the Limits of Economics.

ABSTRACT: Few would question the primacy of economic analysis in the construction and enforcement of contemporary antitrust rules. Chicago-derived principles of price theory have slowly, but inexorably, transcended their traditional boundaries within the United States to find welcome application in Europe and elsewhere. Indeed, it has become standard for antitrust authorities around the world to frame issues of competitive concern in exclusively economic terms. Price theory would thus seem to have become the ubiquitous standard by which to inform competition policy.

Yet, international antitrust harmonization has proven to be frustratingly elusive. Although the two most important jurisdictions find broad agreement on many aspects of competition policy, notable instances of EC/U.S. divergence have become apparent. Given the primacy of economic analysis, it is only natural to suppose that the transatlantic divide will narrow in parallel with advancement in society’s understanding of economics. Put differently, contemporary areas of disagreement should be susceptible to resolution through the lens of economic theory and econometrics alone. Practice ostensibly mirrors this theoretical prediction, as both sides to the transatlantic rift vociferously promote the supremacy of their respective viewpoints in economic terms. The U.S. Justice Department has been especially vocal (and cutting) in its criticism of what it considers to be erroneous economic policy underlying European jurisprudence.

We suggest that the direction of this debate may be misguided. Although price theory has forever revolutionized the substance and application of competition law, its contribution is not unlimited. Economic analysis is subject to serious epistemological limitations with respect to certain areas of antitrust concern, in particular with regard to the trade-off between the short- and long-run. It is noteworthy indeed that recent areas of major divergence are characterized by precisely such economic indeterminacy. Moreover, these policy disagreements are not limited to the international arena—a serious and disturbing rift has become apparent between America’s two enforcement agencies.

We argue, first, that there are important limitations to economic analysis and, second, that the pursuit of long-run convergence must recognize these constraints and rely on a mutual understanding of distinct socio-political cultures and traditions. Recent scholarly and public debate has been noteworthy for its exclusive focus on economics, and may for that reason have been incomplete and inefficacious. This Article explores these concerns by focusing on perhaps the most divisive area of antitrust law, refusals to deal. Such refusals cast the tension between balancing short- and long-run effects into critical relief, and render explicit the limitations of economic theory. Given that the bastion of the Chicago School, the United States, has been incapable of agreeing on a uniform approach in this area, the idea that international law can be harmonized on the basis of economics alone seems strikingly quixotic. Nevertheless, we conclude that outside of the empirically indeterminate issue of balancing the short- and long-run, economics can indeed lead policymakers to optimal and well-defined outcomes.

Divisionalization and Horizontal Mergers in a Vertical Relationship

Posted by D. Daniel Sokol

Tomomichi Mizuno, Competition Policy Research Center - Japan Fair Trade Commission has a paper on Divisionalization and Horizontal Mergers in a Vertical Relationship.

ABSTRACT: In this paper we evaluate the effects of horizontal mergers in a vertical relationship. Each downstream firm can create autonomous divisions. We show that an infinitesimal merger of downstream firms may exhibit a positive welfare effect if the upstream and downstream sectors are sufficiently unconcentrated. However, any merger of upstream firms reduces social welfare. Moreover, a decrease in the concentration in the upstream stage (respectively downstream stage or non-merging stage) makes the welfare effects of the merger in the upstream stage (respectively downstream stage or non-merging stage) less negative (respectively ambiguous or ambiguous).

Role of Economics in Competition Law

Posted by D. Daniel Sokol

The UCL Jevons Institute is again running its popular masters level course on Role of Economics in Competition Law, starting in October 2009. This objective of this 13 week course (between October 2009 - March 2010)  is to introduce the economic theories that underlie competition law and the methods that are used to assess whether business practices are nefarious, benign, or healthy. The course consists of two parts: The first part involves a rigorous introduction to microeconomics and industrial organization theory.  It provides a basic introduction to the economics of markets including the theory of the firm including profit-maximising pricing, perfect competition, monopoly, oligopoly, product differentiation, vertical relationships, and multi-sided markets. The second part involves the rigorous application of economics to competition policy. It includes the analysis of market power, market definition, cartels and other coordinated behaviour, unilateral conduct including predatory and exclusionary practices, horizontal and vertical mergers, and antitrust and intellectual property.  The course is designed to provide students with a deep understanding of how economics is applied to competition policy. The course covers: - Economics of Competition Policy    - Firms and Profit Maximiation - Demand, Supply and Static Competition     - Market Power and Welfare        - Cartels and Other Coordinated Practices - Product Differentiation and New Products - Market Definition and the Analysis of Market Power     - Oligopoly and Game Theory  - Horizontal Mergers      - Pricing Strategies and Abuses      - Economics of Vertical Relationships and Integration        - Vertical Foreclosure and Mergers - Two-Sided Markets  For more information about the course, how to book and prices please use the link below. Space is limited to 10 practitioner places on this course. You are invited to the following event: UCL Jevons Institute: The Role of Economics in Competition Law & Policy Date: Tuesday, October 06, 2009 at 6:00 PM - to - Tuesday, March 02, 2010 at 8:00 PM (GMT) Location: UCL Law Faculty Bentham House Endsleigh Gardens London, London WC1H 0EG United Kingdom For more information click here

Swedish Competition - My Heroes!!!

Posted by D. Daniel Sokol

As some of you know, I have a forthcoming article in the BYU Law Review titled "Competition Policy and Comparative Corporate Governance of State Owned Enterprises."  I am very interested in government's role in anti-competitive practices.  A new press release from the Swedish Competition Authority has caught my eye.  According to the press release:

New Swedish law to prevent unfair competition

Swedish government bodies can in future be prevented from engaging in business activities that distort competition. This is the implication of a legislative proposal that the Government has just presented to the Riksdag (parliament).

“It’s good that we’re now getting rules that prevent public actors from competing with private companies on unfair terms,” says Dan Sjöblom, Director General of the Swedish Competition Authority. “This is an important addition to the prohibitions in our competition laws.”

The proposals will enable the Competition Authority and entrepreneurs to approach the Stockholm City Court and apply for a municipality, a state actor or a county council to be prohibited from engaging in a certain business activity in a manner that distorts competition. An exception is if the activity (procedure) is judged to be in the public interest and therefore defensible.

A central, regional or local government body that undertakes a business activity does not do so on the same terms as a private company. The conditions under which they operate differ. A government agency or municipality cannot be declared bankrupt, and such bodies possess the kind of financial power that very few private enterprises can even get close to.

“The new legal provision will act as a deterrent,” says Dan Sjöblom. “Municipalities or agencies engaging in or planning to launch business activities that compete with companies in the market will in future have to think very carefully before doing so.”

The Competition Authority receives numerous complaints about conflicts caused by public actors competing with private ones. Often, those hardest hit by this type of unfair competition are small businesses operating in local markets.

The Competition Authority welcomes the new rules, which are to apply from 1 January 2010 if approved by the Riksdag.

The Map of Commerce: Internet Search, Competition, and the Circular Flow of. Information

Posted by D. Daniel Sokol

Dan Spulber of Northwestern University Kellog School of Business has posted The Map of Commerce: Internet Search, Competition, and the Circular Flow of. Information.

ABSTRACT: Search firms provide matchmaking services between consumers and suppliers that are central to the efficiency of the economy. The significant economic contributions of search firms as commercial intermediaries have important implications for antitrust policy towards search markets. As search firms generate more information about buyers and sellers, they become intermediaries for an increasing proportion of economic transactions. This article introduces the concept of the "map of commerce" to describe the extensive directory of business constructed by search firms. This article also introduces the concept of the "circular flow of information" to represent the comprehensive nature of the economic information managed by search firms. These firms induce information revelation through self-selection both by consumers and by advertisers. Consumers reveal personal information through the use of keywords and through their online behavior. Advertisers reveal company information by bidding on positions on the search page. Search firms employ information to match buyers with sellers more effectively and to increase earnings from advertising. The analysis shows that economic efficiencies generated by the circular flow of information depend on the strength of competition among search firms. The discussion considers antitrust policy towards Internet search markets, including issues of privacy, competition, and cooperative agreements.

Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs

Posted by D. Daniel Sokol

Katherine Ho, Columbia University - Department of Economics, explains Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs.

ABSTRACT: I investigate the reasons why market expansion attempts by vertically integrated health insurers have largely failed. I use an econometric model of consumer demand for hospitals and insurers to simulate entry of an integrated plan into 28 new markets. The results indicate that entry would increase social surplus by over $34 billion per year. I then investigate several potential barriers to entry. Three are particularly important. Integrated plans cannot attract enough enrollees to support their provider networks unless they exceed competitor quality levels and convince consumers of this benefit. Regulatory restrictions on plans building new facilities may also be important.

Against Positive Harmonization: The European Commission Proposal to Strengthen the Private Enforcement of Competition Law

Posted by D. Daniel Sokol

Jesus Alfaro, AUTONOMA UNIVERSITY OF MADRID writes Against Positive Harmonization: The European Commission Proposal to Strengthen the Private Enforcement of Competition Law.

ABSTRACT: This paper questions the advisability of a positive harmonization of Competition Law within the European Union. The White Paper on Damages Actions for Breach of EC Antitrust Rules (2008) tries to solve an inexistent problem: the insufficient enforcement of antitrust rules by the judiciary and citizens. Notwithstanding, the European Commission neglects the real problem: the lack of enforcement of the mentioned rules by national and European authorities.

Vertical Networks, Integration, and Connectivity

Posted by D. Daniel Sokol

Pinar Doğan explains Vertical Networks, Integration, and Connectivity.

ABSTRACT: This paper studies competition in a network industry with a stylized two layered network structure, and examines: (i) price and connectivity incentives of the upstream networks, and (ii) incentives for vertical integration between an upstream network provider and a downstream firm. The main result of this paper is that vertical integration occurs only if the initial installed-base difference between the upstream networks is sufficiently small, and in that case, industry is configured with two vertically integrated networks, which yields highest incentives to invest in quality of interconnection. When the installed-base difference is sufficiently large, there is no integration in the industry, and neither of the firms have an incentive to invest in quality of interconnection. An industry configuration in which only the large network integrates and excludes (or raises cost of) its downstream rival does not appear as an equilibrium outcome: in the presence of a large asymmetry between the networks, when quality of interconnection is a strategic variable, the large network can exercise a substantial market power without vertical integration. Therefore, a vertically separated industry structure does not necessarily yield procompetitive outcomes.

Empirical Analysis of Competition between Wal-Mart and Other Retail Channels

Posted by D. Daniel Sokol

Lesley Chiou, Occidental College - Department of Economics provides an Empirical Analysis of Competition between Wal-Mart and Other Retail Channels.

ABSTRACT: This paper quantifies the degree of competition between Wal-Mart and different retail channels by exploiting a unique dataset that describes a consumer's choice of store. Using a discrete choice model, I estimate a consumer's choice of retailer in the sales market for DVDs among online, mass merchant, electronics, video specialty, and music stores. Wal-Mart competes more intensely with other mass merchants, and conditional on price and distance, the average consumer still prefers Wal-Mart to most other stores. I also consider a counterfactual experiment regarding the entry of Wal-Mart into 15 proposed store sites into California.

Kartelpuffer

Posted by D. Daniel Sokol

Brent Fisse (Melbourne Law) has a really funny piece for download called Kartelpuffer.

ABSTRACT: An unusual dish – the Kartelpuffer - was presented and swallowed at the Parliamentary Sittings in Canberra in June 2009. The technical name of this dish is the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009.

Download Fisse_Kartelpuffer_230809 (2)

Horizontal Anticompetitive Agreements

Posted by D. Daniel Sokol

Javier Tapia, University College London - Faculty of Laws has a chapter on Horizontal Anticompetitive Agreements (Carácter Anticompetitivo de los Acuerdos Restrictivos de la Competencia).

ABSTRACT: This work (written in Spanish) summarises the most important aspects of the international literature on cartels and coordinated behaviour; provides some insights from Chilean practice; and proposes some policy options. Part I analyses general aspects of coordinated behaviour, from both legal and economic standpoints. Particularly, the conditions of sustainability of the coordination and the social costs of collusion are explained. Part II starts examining the concept of agreement and the means of proof. Then it makes a comparison between the treatment of collusion in Chile and Europe and the US. So far, the treatment of collusive behaviour in Chile - particularly regarding cartels - has been unfortunate in several aspects. However, a recent reform to the law should enable the introduction of a more accurate and modern approach. Crucially, I argue, the introduction of a per se rule is vital. This part ends with a brief description of the adequate level of enforcement. Part III assesses the main aspects of tacit collusion, with particular focus on parallel behaviour and information exchanges. Finally, the conclusion stresses the need for a pragmatic approach: to focus enforcement only on explicit agreements - at least at this early stage of development of the new rules introduced by the mentioned legal reform.

The European Union, the United States, and Microsoft: A Comparative Review of Antitrust Doctrine

Posted by D. Daniel Sokol

Daniel J. Gifford (University of Minnesota - Law School) has written on The European Union, the United States, and Microsoft: A Comparative Review of Antitrust Doctrine.

ABSTRACT: When a seller bundles together two products that have previously been sold separately, the arrangement is sometimes referred to as a tie. If the two products are bound together physically, it is often referred to as a technological tie. In the 1970s, IBM physically integrated so-called peripheral products, such as disk drives and printers which previously had been sold separately, into its central processing units. This integration was then attacked (largely unsuccessfully) by independent manufacturers of peripheral equipment as unlawful tying and as monopolization through tying.

More recently, Microsoft has incorporated products, such as browsers and media players, into its operating system, behavior that again amounts to technological tying. It has also improved its server software by heightening the degree to which servers employing that software can interact. By raising the level of interaction among servers equipped with its software, Microsoft has so integrated work group servers as to enable groups of small servers to approach the capacities of mainframe computers. The European competition-law authorities see both matters as problematic. The integration of the media player has been condemned as tying; and the heightened server interaction has been faulted for failing to provide the interoperability that rival server software requires in order to participate on an equal footing with Microsoft server software in Windows work groups. Microsoft’s integration (at least in the view of the European antitrust authorities) also raises issues of essential facilities, and of the role of antitrust in achieving interoperability.

Integration of these sorts - e.g., the hardware integrations of IBM and the software integrations of Microsoft - raise antitrust issues, as the extensive litigation in the United States and Europe over Microsoft’s behavior has revealed. We have now reached a moment in time in which both the American and European laws are sufficiently developed to warrant reflection and comparison. That is the task approached in this article. Part I, below, examines the European approach, exemplified in the decisions of the European Commission and the Court of First Instance about the interoperability of Microsoft’s server software. That part also examines the integration of the Windows Media Player into the Windows operating system. Part II reviews the U.S. decisions dealing with Microsoft’s integration of its Internet Explorer browser into its operating system. Since most readers will be familiar with the U.S. litigation at least in its main routlines, that review can be brief. Part III contains an initial comparison of the U.S. and European approaches to product integration. The conclusion in Part IV identifies the major differences and the doctrinal bases on which they rest.

France Télécom/Wanadoo Judgment: 'To Recoup or Not to Recoup? That 'Was' the Question for a Predatory Price Finding under Article 82 EC'

Posted by D. Daniel Sokol

Alberto Alemanno, HEC Paris - Law Department and Marco Ramondino, discuss France Télécom/Wanadoo Judgment: 'To Recoup or Not to Recoup? That 'Was' the Question for a Predatory Price Finding under Article 82 EC'.

ABSTRACT: The European Court of Justice seized the opportunity of the first predatory pricing case brought to its attention since Tetra Pak II to have a say in the debate over the need to prove the possibility of recoupment of losses, thus clarifying certain ambiguities of its case-law concerning the test of predation.On 2 April, 2009, the ECJ dismissed an appeal brought by France Télécom against the judgment of the Court of First Instance in the Wanadoo predatory pricing case. The CFI judgment upheld the European Commission's finding that Wanadoo Interactive SA, a subsidiary of France Télécom, had abused its dominant position on the French market for high-speed internet access between March 2001 and October 2002. Notwithstanding the Advocate General Mazák’s call, in his Opinion of 25 September 2008, for introducing a requirement of recoupment of losses under Article 82 EC in order to inaugurate a more economic approach to predatory pricing, the ECJ decided not to incorporate this additional requirement to the actual predatory price test. This outcome is reflected in the Commission's Guidance on Article 82 EC enforcement priorities published in February 2009 and confirms the European idea according to which to protect consumer welfare requires the protection the structure of the market and its competitors. After the France Télécom judgment, it may be pacifically stated that "To recoup or not to recoup? That "was" the question".

Criminal Cartels: Individual Liability and Sentencing

Posted by D. Daniel Sokol

Caron Beaton-Wells and Brent Fisse (both University of Melbourne Law School) have posted Criminal Cartels: Individual Liability and Sentencing.

ABSTRACT: The liability rules and sentencing system that will apply to individual offenders under Australia's new criminal cartel regime are among the more important areas of cartel criminalisation that warrant scrutiny. Their importance is underscored by the risk of exposure to jail and the extensive array of investigative powers available to enforcement agencies. This paper reviews in detail the liability and sentencing rules that will apply to individuals under the Australian regime. It concludes those rules are neither simple nor satisfactory. The overall picture is one of complexity, ill-designed or outdated legislative provisions, uncertainty about the ultimate form of the cartel criminalisation legislation, and indeterminacy as to the sentences that will be imposed on cartel offenders.

Competition Rules in the TRIPS Agreement: The CFI's Ruling in Microsoft v. Commission and Implications for Developing Countries

Posted by D. Daniel Sokol

Tu T. Nguyen, Faculty of Law, Lund University addresses Competition Rules in the TRIPS Agreement: The CFI's Ruling in Microsoft v. Commission and Implications for Developing Countries.

ABSTRACT: The ruling of the European Court of First Instance in Microsoft v. Commission in was a pivotal judgment in the area of interaction between competition law and IPRs. It has been, and continues to be, a subject of many controversial discussions from both legal and economic perspectives not only in the EU but also all over the world. It also illustrated that the application of IPR-related competition law is a complex and controversial issue in both developed and developing countries. In this legal process, competition authorities in developing countries face with even greater and more serious problems. Developing countries, therefore, rarely use flexibilities concerning competition rules under the TRIPS Agreement of the WTO to address IPR-related anti-competitive practices in reality.

In this context, the Microsoft v. Commission ruling may be an important catalyst in the interpretation and application of competition rules in the TRIPS Agreement. Until now, Microsoft v. Commission was the first and unique judgment given by a WTO member's court that invoked the TRIPS competition rules to justify application of WTO member's competition law to IPR exercise. Hopefully, this ruling will encourage competent authorities of WTO members, particularly the ones in developing countries, and embolden them to apply national competition law to IPRs and technology transfer for the sake of customer welfare and national interests.

The Commission’s Review of the Rules applicable to Vertical Agreements

Posted by D. Daniel Sokol

The Commission’s Review of the Rules applicable to Vertical Agreements

Claude Rakovsky, Head of Unit, DG COMP
Stephen Kinsella, Partner, Sidley Austin LLP
18 September 2009 – Hilton Hotel, 38 Boulevard de Waterloo, Brussels

Lunch Talk Series - Programme

12:00 - 12:30: Sandwich lunch and socializing
12:30 - 13:00: Presentation
13:00 - 13:15: Comments
13:15 - 14:00: Roundtable discussion

Inquiries

Global Competition Law Centre
College of Europe, Bruges
E-mail: [email protected]
Fax : +32 (0) 2 741 1012
http://www.gclc.coleurop.be

An Evidence-Based Approach to Exclusive Dealing and Loyalty Discounts

Posted by D. Daniel Sokol

Josh Wright of George Mason Law School advocates An Evidence-Based Approach to Exclusive Dealing and Loyalty Discounts.

ABSTRACT: At the recent Section 2 hearings focused on the antitrust analysis of exclusive dealing contracts, a sensible consensus view emerged that a necessary condition for anticompetitive harm in an exclusive dealing or de facto exclusive contract is that the contract deprives rivals of the opportunity to compete. These contracts, including market-share discounts and loyalty discounts, can harm competition when they deprive rivals of an entrenched firm from accessing distribution sufficient to achieve a minimum efficient scale. The recently-withdrawn Section 2 Report reflects this consensus. This article discusses the strengths and weaknesses of the Section 2 Report approach to exclusive dealing and loyalty discounts.

Competition Politics: A Political Economy of Antitrust Regulation in Developing Countries

Posted by D. Daniel Sokol

Stephen J. Weymouth, University of California, San Diego (Political Science) has a new piece on Competition Politics: A Political Economy of Antitrust Regulation in Developing Countries.

ABSTRACT: Many developing countries have established competition (antitrust) agencies in recent years, with the aim of eroding anti-competitive rents that may accrue in the absence of regulatory oversight. Other countries have no formal competition agencies. What explains the decision of governments to delegate regulatory authority to independent agencies? This paper presents a simple model demonstrating that the likelihood of delegation decreases with the relative political strength of incumbent firms, who benefit from regulatory laxity.The model shows that incumbent firms’ strength decreases (i.e., delegation becomes more likely) in countries with: 1) competition for political office, and 2) “personalistic” electoral institutions, by increasing the individual accountability of politicians. I test the argument by constructing a new dataset covering over 100 developing countries over the period 1975-2006 that records the year of passage of laws establishing competition agencies. I model the decision to delegate to an agency using proportional hazard models. Consistent with my theory, competition for political office speeds up the adoption of competition laws that delegate authority to regulatory agencies. Furthermore, I find that personalistic electoral rules deter the ability of the incumbent interest group to block these competition policy reforms.