Antitrust & Competition Policy Blog

Reconciling the Opposing Views of Critical Elasticity

Posted by D. Daniel Sokol

Michael Baumann (Economists Incorporated) & Paul Godek (Compass Lexecon) make an attempt at Reconciling the Opposing Views of Critical Elasticity.

ABSTRACT: Market definition is the core of antitrust analysis, and the concepts of “critical elasticity” and “critical loss” have often been applied to the task of defining relevant antitrust markets, in both differentiated-product and homogenous-product scenarios. The critical elasticity is that elasticity of demand that is just high enough to prevent a hypothetical monopolist from profitably increasing price by a threshold “small but significant” amount; critical loss is the fraction of sales lost by the hypothetical monopolist, as implied by the critical elasticity. Evidence that the actual demand elasticity exceeds the critical elasticity indicates that the product in question is not a relevant market.

In recent articles, several researchers have offered an alternative approach to the issue of critical elasticity. Their view is that the traditional application of the concept is flawed and that critical elasticity calculations contain information about actual elasticities of demand. We believe that alternative view to be half wrong. While it offers a misleading interpretation of critical elasticity analysis, the alternative view does reveal a flaw in the conventional approach—a flaw that proponents of the conventional approach have failed to recognize. Here we present a revised and more general critical elasticity model, one that might reconcile the competing arguments. The new model also implies substantially higher critical elasticities than previous models would indicate.

Competition as a Socially Desirable Dilemma - Theory vs. Experimental Evidence

Posted by D. Daniel Sokol

Christoph Engel, Max Planck Institute for Research on Collective Goods describes Competition as a Socially Desirable Dilemma - Theory vs. Experimental Evidence.

ABSTRACT: Cartels are inherently instable. Each cartelist is best off if it breaks the cartel, while the remaining firms remain loyal. If firms interact only once, if products are homogenous, if firms compete in price, and if marginal cost is constant, theory even predicts that strategic interaction forces firms to set the market clearing price. For society, this would be welcome news. Without antitrust intervention, the market outcome maximises welfare. The argument becomes even stronger if the opposite market side has a chance to defend itself; if imposing harm on the opposite market side is salient; if it is clear that cartels are at variance with normative expectations prevalent in society. There is an equally long list of reasons, though, why such optimism might be unwarranted: capacity is limited; interaction is repeated, and the end is uncertain; firms might be willing to run a limited risk of being exploited by their competitors, hoping that the investment pays. This paper explores the question both theoretically and experimentally. In the interest of capitalising on a rich body of experimental findings, and on the concept of conditional cooperation in particular, the paper offers a formal model that interprets oligopoly as a linear public good.

JTC Issues Cease and Desist Order Against Qualcomm

Posted by D. Daniel Sokol

Available in English here.

Horizontal Anticompetitive Agreements

Posted by D. Daniel Sokol

Javier Tapia, UCL Law writes 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.

Article 81 EC and Public Policy

Posted by D. Daniel Sokol

Christopher Townley (King's College, London - Law) has a new book out in print Article 81 EC and Public Policy.  This is an important contribution to Article 81 analysis.

BOOK ABSTRACT: This book discusses the role of public policy in Article 81 of the EC Treaty. The Commission, and recently the Court of First Instance have said that the sole objective of Article 81 EC is consumer welfare. Many competition lawyers support this view. Writing in a crisp, plain style, Townley demonstrates that public policy considerations are still relevant in that provision. He also suggests how and where they should be considered.

The book explains how some of the most complex competition law cases can be understood and offers a framework for those fighting or deciding such cases in the future. As such, it will be of interest to European competition lawyers, both academics and practitioners; as well as students, seeking a deeper understanding of how the European competition rules work and how they interact both with European Union and Member State public policy goals.

Upstream Horizontal Mergers and Efficiency Gains

Posted by D. Daniel Sokol

Chrysovalantou Milliou, Athens University of Economics and Business and Apostolis Pavlou address Upstream Horizontal Mergers and Efficiency Gains.

ABSTRACT: We study upstream horizontal mergers and their potential efficiency gains. We show that an upstream horizontal merger can give rise to two efficiency-enhancing effects when firms trade through two-part tariffs. It increases R&D investments and decreases wholesale prices when downstream competition is not too strong. Examining whether the merger’s potential efficiency gains can overcome its anti-competitive effects in terms of welfare, we show that when firms merge usually both of the above mentioned efficiencies are realized and they are passed on to consumers. This holds to a lesser extend when firms trade through linear contracts.

Identifying and Remedying Exclusionary Conduct: Microsoft, the DOJ Section 2 Report, and the New Administration

Posted by D. Daniel Sokol

My colleague Bill Page has posted Identifying and Remedying Exclusionary Conduct: Microsoft, the DOJ Section 2 Report, and the New Administration.

ABSTRACT: The Department of Justice’s Section 2 Report considered in great detail how courts should best go about identifying exclusionary conduct and how they should best remedy that kind of conduct once they found it. Even though the new Assistant Attorney General has now withdrawn the Report as an official statement of Antitrust Division policy, the questions the Report addressed remain for the new administration. In this essay, I will comment on two subsidiary but nonetheless critical subjects that the DOJ addressed in the Report: general standards of exclusion and affirmative-obligation remedies. In both instances, my observations will draw on the experience of United States v. Microsoft, the DOJ’s last and still pending monopolization case.

Antitrust Federalism: Enhancing the Federal-State Relationship

Posted by D. Daniel Sokol

Antitrust Federalism: Enhancing the Federal-State Relationship

Wednesday, Oct. 7, 2009, 9 a.m. - 12:30 p.m.

  “Antitrust Federalism: Enhancing the Federal-State Relationship,” a conference that will outline new measures the government is taking to strengthen its antitrust laws, and how agencies can collaborate more effectively in joint law enforcement efforts under the Obama administration. In the past, federal and state officials had a contentious relationship, resulting in missed opportunities to make antitrust enforcement more efficient and effective. Now, at a time when resources are at a premium, there is a greater need for state and federal governments to cooperate with each other and coordinate efforts.

The conference is being hosted by the Columbia Law School National State Attorneys General Program and the National Association of Attorneys General (NAAG).

Christine A. Varney, Assistant Attorney General, Antitrust Department, DOJ
Jon D. Leibowitz, Chairman, Federal Trade Commission
Richard Cordray, Attorney General of Ohio, Co-Chair, NAAG Antitrust Committee
James Tierney, Director, National State Attorneys General Program, Columbia Law School

Columbia University
Faculty House
64 Morningside Drive
New York, NY 10027

Administrative Monopoly and the Anti-Monopoly Law: An Examination Of the Debate in China

Posted by D. Daniel Sokol

Gordon Y.M. Chan, Department of Law & Business, Hong Kong Shue Yan University analyzes Administrative Monopoly and the Anti-Monopoly Law: An Examination Of the Debate in China.

ABSTRACT: After more than a decade of preparation, China finally passed the Anti-Monopoly Law (AML) on August 30, 2007. This paper examines the debate over whether or not administrative monopoly should be included in the ambit of the AML, which took place throughout the drafting process of this new law. Administrative monopoly refers to the abusive use of administrative power by government agencies to engage in monopolistic activities. Owing to the administrative nature of this type of monopoly, the intent to regulate it by an economic law, such as the AML, has stirred up much controversy. Having analyzed the arguments both in support of and in opposition to the inclusion, this paper suggests the need to adopt a more comprehensive scheme in tackling administrative monopoly. Also, the enforcement mechanism of the AML will have to be strengthened in order to prevent this new law from degenerating into ‘a toothless tiger’. Furthermore, the competition law regime of China will benefit from in-depth research in overseas anti-monopoly practices. In particular, the experiences of the former socialist states in Europe should be taken into account, given that they are similarly undergoing the transition from a planned economy to a market economy.

The Energy Antitrust Handbook, Second edition

Posted by D. Daniel Sokol

The ABA has come out with the second edition of the Energy Antitrust Handbook.

This Second edition of the Energy Antitrust Handbook presents a guide to an industry of increasing importance to the U.S. economy. It is written to assist energy, regulatory, and antitrust lawyers in understanding the multilayered complexity of this field by providing a basic background on antitrust issues in the energy industry. The principal focus of the first edition of this handbook was on electricity and natural gas, this edition has been broadened in scope to include more sectors of the energy industry.

By reading this book, lawyers already familiar with antitrust law will gain an understanding of related energy issues, the market structure, and the application of the antitrust laws to these industries. Lawyers and executives already familiar with the energy industry, but not with antitrust law, will find this book provides an understanding of the antitrust laws applicable to energy.

The energy industry has been at the center of the development of the antitrust laws. In particular, the oil industry has been the source of many seminal antitrust cases. The electric and natural gas industries also have contributed several seminal cases, but have been subject to substantial if not complete antitrust immunity in light of pervasive federal and state regulation until the introduction of competition in the late 1980s and 1990s. Although the electric and natural gas industries continue to be subject to less pervasive regulation, new antitrust issues and concerns about "market manipulation" have become the focus of scrutiny in the electric, natural gas, and petroleum industries.

The nine chapters in this handbook cover a range of issues as follows:

--Chapter I provides an introduction to the energy industry.

--Chapter II is an overview of the history of regulation and deregulation of natural gas and electricity.

--Chapter III provides a discussion of the antitrust immunities and defenses available in many energy cases, including the filed rate doctrine, state action immunity, Noerr-Pennington immunity, and implied repeal.

--Chapter IV discusses mergers, acquisitions, divestitures and related issues. Although FERC formally adheres to the DOJ/FTC Merger Guidelines, its application of those guidelines to the electric power and gas industries is unique.

--Chapter V focuses on joint ventures and joint action by competitors, and includes a discussion of the DOJ/FTC Competitor Collaborations Guidelines. Because recent efforts to accelerate the pace of deregulation are frequently based on the establishment of federally encouraged joint ventures [for example, Independent System Operators (ISOs)] this chapter is of particular importance to both energy and antitrust lawyers.

--Chapter VI focuses on monopolization issues. Because the electric and gas industries have moved toward deregulation, a discussion of conduct designed to maintain or acquire monopoly power is particularly relevant. Much of the electric power/antitrust discussion on essential facilities is contained in this section.

--Chapter VII deals with pricing issues, including agreements among competitors affecting price, such as price fixing, and single firm pricing conduct.

--Chapter VIII discusses issues related to nonprice agreements, including joint conduct to exclude competition, territorial agreements, and exclusive dealing arrangements.

--Chapter IX addresses the market manipulation rules that are the subject of new and vigorous debate at the agencies.

While each of these chapters discusses standard antitrust analyses, the application to these industries is often unusual because of both regulated and unregulated aspects to these practices.

A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet

Posted by D. Daniel Sokol

Greg Sidak (Criterion Economics) has posted A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet.

ABSTRACT: On Sept. 21, 2009, the Federal Communications Commission announced that it will issue a formal notice of proposed rulemaking to adopt "network neutrality" regulations. “Network neutrality” is the shorthand for a proposed regime of economic regulation for the Internet. Because of the trend to deliver traditional telecommunications services, as well as new forms of content and applications, by Internet protocol (IP), a regime of network neutrality regulation would displace or subordinate a substantial portion of existing telecommunications regulation. If the United States adopts network neutrality regulation, other industrialized nations probably will soon follow. As a result of their investment to create next-generation broadband networks, network operators have the ability to innovate inside the network by offering both senders and receivers of information greater bandwidth and prioritization of delivery.

Network neutrality regulation would, among other things, prevent providers of broadband Internet access service (such as digital subscriber line (DSL) or cable modem service) from offering a guaranteed, expedited delivery speed in return for the payment of a fee. The practical effect of banning such differential pricing (called “access tiering” by its critics) would be to prevent the pricing of access to content or applications providers according to priority of delivery. To the extent that an advertiser of a good or service would be willing to contract with a network operator for advertising space on the network operator’s affiliated content, another practical effect of network neutrality regulation would be to erect a barrier to vertical integration of network operators into advertising-based business models that could supplement or replace revenues earned from their existing usage-based business models. Moreover, by making end-users pay for the full cost of broadband access, network neutrality regulation would deny broadband access to the large number of consumers who would not be able to afford, or who would not have a willingness to pay for, what would otherwise be less expensive access.

Proponents of network neutrality regulation argue that such restrictions on the pricing policies of network operators are necessary to preserve innovation on the edges of the network, as opposed to innovation within the network. However, recognizing that network congestion and real-time applications demand some differential pricing according to bandwidth or priority, proponents of network neutrality regulation would allow broadband Internet access providers to charge higher prices to end-users (but not content or applications providers) who consume more bandwidth or who seek priority delivery of certain traffic.

Thus, the debate over network neutrality is essentially a debate over how best to finance the construction and maintenance of a broadband network in a two-sided market in which senders and receivers have additive demand for the delivery of a given piece of information—and hence additive willingness to pay. Well-established tools of Ramsey pricing from regulatory economics can shed light on whether network congestion and recovery of sunk investment in infrastructure are best addressed by charging providers of content and applications, broadband users, or both for expedited delivery.

Apart from this pricing problem, an analytically simpler component of proposed network neutrality regulation would prohibit a network operator from denying its users access to certain websites and Internet applications, such as voice over Internet protocol (VoIP). Although some instances of blocking of VoIP have been reported, such conduct is not a serious risk to competition. To address this concern, I analyze whether market forces (that is, competition among access providers) and existing regulatory structures are sufficient to protect broadband users. I conclude that economic welfare would be maximized by allowing access providers to differentiate services providers of content and applications in value-enhancing ways and by relying on existing legal regimes to protect consumers against the exercise of mark! et power, should it exist.

Yom Kippur and Antitrust

Posted by D. Daniel Sokol

Sundown tonight begins Yom Kippur, the holiest day of the year in the Jewish religion.  I will not be blogging till tomorrow night as I spend this solemn 24 hour period fasting, repenting and atoning for my sins.  WARNING: This is one of the rare posts in which I do not have an antitrust or larger competition spin on a a posting.  Maybe one of my co-bloggers will post something on an antitrust topic.

As I think about deep issues and reflect back upon the past year, I try to explain to my daughters how we have a commitment to making the world a better place.  For us, this is a biblical calling.  To be sure, there are many important Jewish contributions to the world- with Nobel prize season upon us, I note that the 12 million Jews of the world have produced nearly a quarter of all Nobel Prize winners.  However, I want to focus on the contribution to making the world a better place by one of my personal Jewish heroes - comedian Mel Brooks.  Mel has made me laugh very hard with his 2000 Year Old Man skit, and with movies Blazing Saddles, Young Frankenstein and The Producers.  Robin Hood Men in Tights was not funny and so I pretend it does not exist, much the way Godfather Part III and Star Wars Episodes I, II, and III do not exist.  In this video clip Brooks explains why he is proud to be a Jew.  I found a passage from a book in which Brooks provides us with how his Jewish heritage impacted his comedy:

Look at Jewish history. Unrelieved, lamenting would be intolerable. So, for every 10 Jews beating their breasts, God designated one to be crazy and amuse the breast-beaters. By the time I was five I knew I was that one.... You want to know where my comedy comes from? It comes from not being kissed by a girl until you're 16. It comes from the feeling that, as a Jew and as a person, you don't fit into the mainstream of American society. It comes from the realization that even though you're better and smarter, you'll never belong.

American-Jewish Filmmakers: Traditions and Trends (University of Illinois Press)

Have an easy fast and Gmar Chatima Tova.

Call for Papers - Indian Journal of International Economic Law

Posted by D. Daniel Sokol

The Indian Journal of International Economic Law (IJIEL) of the National Law School of India University (NLSIU) has posted a call for papers.

Download WEB CALL LETTER

Meet the New Federal Trade Commission Bureau Directors

Posted by D. Daniel Sokol

American Bar Association Section of Antitrust Law's Federal Civil Enforcement Committee

Presents:

Meet the New Federal Trade Commission Bureau Directors


A Brown Bag Program to be held

Thursday, October 8, 2009
12:00 p.m. - 1:30 p.m. ET
DrinkerBiddle, 1500 K Street, NW
Washington, DC 20005

With the change in political administrations there are new enforcers at the antitrust agencies.  The Federal Trade Commission Bureau Directors have settled in to their positions and we now have the opportunity to learn more about their enforcement and policy priorities.

Panelists:

Richard A. Feinstein, Director of the Bureau of Competition
Mr. Feinstein rejoined the FTC from Boies, Schiller & Flexner LLP, where he focused on antitrust litigation and counseling.  Previously at the FTC, he served as an Assistant Director in the Bureau of Competition's Health Care Services and Products Division.

David C. Vladeck, Director of the Bureau of Consumer Protection
Prior to the FTC, Mr. Vladeck was a Professor of Law at Georgetown University Law Center.  In addition, he co-directed the Center's Institute for Public Representation.  Before Georgetown, Mr. Vladeck spent almost 30 years with Public Citizen Litigation Group.

Joseph Farrell, Director of the Bureau of Economics
Before joining the FTC, Mr. Farrell was a Professor of Economics at the University of California, Berkeley.  He also has served as Deputy Assistant Attorney General and Chief Economist for the Antitrust Division of the U.S. Department of Justice.

Moderator:

Andrea Agathoklis, Freshfields Bruckhaus Deringer

Register now by email to [email protected] or by phone to Donna Fleming at (202) 230-5627.  Please indicate whether you plan to attend in person or to dial in.  We will distribute the call-in number by email to all registrants in advance.  There is no charge.

The Section will post a downloadable recording of this program in MP3 format in the Members Only area of its website, http://www.abanet.org/antitrust/at-bb/bb-audio.shtml.

Market Shares in Two-Sided Media Industries

Posted by D. Daniel Sokol

Hans Jarle Kind, Norwegian School of Economics & Business Administration (NHH), and Frank Stähler, University of Otago - Department of Economics explain Market Shares in Two-Sided Media Industries.

ABSTRACT: This paper generalizes the frequently used Hotelling model for two-sided markets in order to determine the equilibrium market shares. We show that advertisement levels depend neither on the media price nor on the location of the media firm. An increase in advertising revenues does not change location but only the media price. If the distribution of consumers is asymmetric, market shares will be asymmetric as well, and the media firm with the larger market share charges the higher media price. The larger firm makes a higher profit per reader and in aggregate compared to its smaller rival.

Long-Term Contracts and Competition on European Gas Markets - Has the Commission Struck the Right Balance

Posted by D. Daniel Sokol

Aldo Spanjer, Leiden Law School asks Long-Term Contracts and Competition on European Gas Markets - Has the Commission Struck the Right Balance.

ABSTRACT: This article examines whether the balance currently struck by the European Commission between long-term contracting and the introduction of competition will ensure a sustainable level of competition on European gas markets, i.e. competition that not impedes investments. It examines whether this balance – which can be derived from a recently closed antitrust case against Distrigas – takes proper account of the benefits of long-term contracting. The current balance recognizes the possibility of efficiencies related to long-term contracts. This article uses the transaction cost economics framework to assess this balance, because this science of contract explicitly focuses on contracts and their ex-post properties. It turns out that the Commission’s balance is inadequate because the advantages of long-term contracting in terms of mitigating opportunistic regulatory behaviour are not acknowledged. One likely consequence is that the Commission will intervene, and force adaptations to long-term contracts, more often than efficient.

Why Airline Antitrust Immunity Benefits Consumers

Posted by D. Daniel Sokol

Daniel Kasper & Darin Lee (LECG) explain Why Airline Antitrust Immunity Benefits Consumers.

ABSTRACT: Any analysis of immunized airline alliances must begin by recognizing that, unlike most other global businesses, airlines are precluded by a host of laws and regulations in the United States and abroad from acquiring control of foreign airlines and from carrying domestic traffic in other countries. These barriers to investment and market entry effectively preclude any single carrier from building a global network using its own network resources and aircraft and thus pose a particular problem for the airline industry, which has become an increasingly network-based business since deregulation. As a result, the only way a U.S. airline can provide convenient connections, common service standards, lounge access, and frequent flyer credits for its customers traveling internationally to points that the U.S. carrier cannot itself serve is by forming an alliance with a foreign carrier. Likewise, foreign carriers must rely on alliances with U.S. carriers to provide their customers access to routes that the foreign carrier cannot serve for legal or economic reasons.

Because these joint ventures involve cooperation between actual or potential competitors, airlines must obtain a grant of antitrust immunity (“ATI”) from the U.S. Department of Transportation (“DOT”) and foreign competition authorities before implementing their alliance.

Reform and Competitive Selection in China: An Analysis of Firm Exits

Posted by D. Daniel Sokol

Qing Gong Yang (New Zealand Commerce Commission) and Paul Temple (University of Surrey) write on Reform and Competitive Selection in China: An Analysis of Firm Exits.

ABSTRACT: This paper considers aspects of the competitive selection process in China - firm entry, survival, and exit - in an important sector of manufacturing, looking in particular for changes resulting from the latest stage of reforms. Using industry survey data from a province in North-East China, we find substantial differences in the process between ownership types. By conducting a simple decomposition of the aggregate productivity growth and exploring the determinants of firm’s exit using a hazard rate model, we observe a substantial rate of churning of enterprises in the sector, and find that the competitive selection processes operate, for small and collectively owned enterprises (COEs), in a manner consistent with a private market economy. In contrast, such processes appear not to be functioning for state owned enterprises (SOEs). We conclude that competitive selection in China is not providing a sufficiently strong su! bstitute for corporate governance based on ownership.

The Impact of Firm Size and Market Size Asymmetries on National Mergers in a Three-Country Model

Posted by D. Daniel Sokol

Luis Santos-Pinto (HEC - Business School) explains The Impact of Firm Size and Market Size Asymmetries on National Mergers in a Three-Country Model.

ABSTRACT: This paper studies the impact of firm and market size asymmetries on merger decisions. To do that I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.

Our Progress Towards International Convergence

Posted by D. Daniel Sokol

Christine Varney (DOJ) gave a recent speech on Our Progress Towards International Convergence at the Fordham conference.