Antitrust & Competition Policy Blog

Bridging the Divide? Theories for Integrating Competition Law and Consumer Protection

Posted by D. Daniel Sokol

Max Huffman, Indiana University School of Law -- Indianapolis provides his thoughts on Bridging the Divide? Theories for Integrating Competition Law and Consumer Protection.

ABSTRACT: Commissioner Kovacic of the US Federal Trade Commission has stated that “consumer protection laws are important complements to competition policy.” According to the UK Office of Fair Trading, “[c]ompetition and consumer policy are interdependent”; together they “provide a framework for markets to deliver maximum benefits for consumer welfare and productivity growth.” Competition Commissioner Aitken of the Canadian Competition Bureau noted, “I do really think the two mandates address two sides of the same coin with the ultimate goal of economic and consumer welfare.” At the Fourth Antitrust Marathon, hosted by the Irish Competition Authority and executed by Professor Spencer Waller and Dr. Philip Marsden, the lead-off topic was the integration of competition law and consumer protection. This paper theorizes that topic.

Competition with Exclusive Contracts and Market-Share Discounts

Posted by D. Daniel Sokol

Giacomo Calzolari, University of Bologna - Department of Economics, and Vincenzo Denicolò, University of Bologna - Department of Economics describe Competition with Exclusive Contracts and Market-Share Discounts.

ABSTRACT: We study the effects of exclusive contracts and market-share discounts (i.e., discounts conditioned on the share a firm receives of the customer's total purchases) in an adverse selection model where firms supply differentiated products and compete in non-linear prices. We show that exclusive contracts intensify the competition among the firms, increasing consumer surplus, improving efficiency, and reducing profits. Firms would gain if these contracts were prohibited, but are caught in a prisoner's dilemma if they are permitted. In this latter case, allowing firms to offer also market-share discounts unambiguously weakens competition, reducing efficiency and harming consumers. However, starting from a situation where exclusive contracts are prohibited, the effect of market-share discounts (which include exclusive contracts as a limiting case) is ambiguous.

Merger control as barrier to EU banking market integration

Posted by D. Daniel Sokol

Matthias Köhler (ZEW) has posted Merger control as barrier to EU banking market integration.

ABSTRACT: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for prudential reasons and formal errors. Because it became later public that both deals were not blocked for prudential reasons, but to protect domestic banks from foreign investors. A survey of the EU Commission indicates that the misuse of supervisory powers and political interference is not only a barrier to cross-border consolidation in Italy, but in other EU countries as well. Systematic empirical evidence on the role of merger control as barrier to M&A is, however, still missing. The main problem is the lack of data on the scope for politicians and supervisors to block M&A during merger control. The main contribution of this paper is to collect this data and to construct indices on the political independence of the supervisory authorities and the transparency of merger control. The main source of informati! on is a questionnaire that was sent to the supervisors in the 25 EU member countries between October 2006 and March 2007.

Iqbal, Twombly, and the Expected Cost of False Positive Errors

Posted by D. Daniel Sokol

Max Huffman Indiana University School of Law -- Indianapolis and Mark Anderson University of Idaho - College of Law have written on Iqbal, Twombly, and the Expected Cost of False Positive Errors.

ABSTRACT: The Twombly/Iqbal plausibility standard is rooted in a concern that allowing a plaintiff to proceed to discovery creates a possibility that a defendant facing a non-meritorious claim will settle rather than endure the burdens of discovery. Such settlements create so-called “false positives,” since a plaintiff recovers a remedy to which it is not entitled. False positives reflect a wealth transfer from an innocent defendant to an undeserving plaintiff. They also induce parties to order their affairs to avoid innocent behavior that might give rise to false positives in the future. This over-deterrence results in harm to parties who never end up in court, and has external social costs where the over-deterred party’s conduct is beneficial. The relevant question is not absolute cost, but the expected cost of false positive error. The expected cost of false positives depends also on their likelihood.
Likelihood turns on the burdensomeness of discovery in a particular context. Non- burdensome discovery does not produce a great incentive to settle. Burdensomeness depends on the nature of the contested facts. Facts that are uniquely in the hands of the defendants threaten a substantial burden. Contested facts available both to the plaintiff and the defendant threaten a much lesser burden. Whether facts are uniquely in the hands of the defendant varies depending on the particular element of a substantive claim in controversy.

Section II analyzes the change in the pleading standard that occurred in Twombly and Iqbal. Section III examines the rationale for the Twombly/Iqbal plausibility standard and its relationship to the various types of facts that can be put in controversy by different types of elements of substantive claims. This examination produces the conclusion that applying the Twombly/Iqbal standard requires separately analyzing the likelihood of false positives raised by each element of a substantive claim. Section IV undertakes this analysis in the context of antitrust claims under Sections One and Two of the Sherman Act. The subsections of Section IV identify an element of a Sherman Act claim, analyze the nature of facts relevant to the element and explain how the plausibility standard should apply to facts of that nature. In Section V we test decided cases for their adherence to the expected cost of false positive error approach. We conclude in Section VI with the suggestion that a similar element-by-element analysis is necessary for each substantive field of federal civil litigation.

A framework to enforce anti-predation rules

Posted by D. Daniel Sokol

Kai Hüschelrath and Jürgen Weigand (both ZEW - Econ) have posted A framework to enforce anti-predation rules.

ABSTRACT: The paper develops a framework to enforce anti-predation rules that explicitly takes the intervention stage into account. In particular, it is proposed to improve predation enforcement by focusing on two channels: refining the current regime, and amending it. With respect to the refinement of the current predation enforcement regime, criteria for the imposition of optimal gain- or harm-based fines are derived in order to sharpen the deterrent effect of predation enforcement. However, given the very low probability of conviction for predators a policy proposal solely based on an increase in the fines for detected and convicted predators might be too weak to significantly amplify the deterrence effect in particular and to improve predation enforcement in general. As a consequence, the introduction of a pre-screening approach is proposed, which aims at identifying industries in which entry is difficult but desirable and a p! redation strategy might be a suitable instrument for an incumbent to fight such occasional entry attempts. In those industries, it is advisable to reduce the high standard of proof in predation enforcement, as its basic justification - the danger to create a negative deterrence effect - is significantly reduced.

OECD Competition Committee Meeting in Paris

Posted by D. Daniel Sokol

I am in Paris today at the OECD meeting.  I am presenting my work on comparative corporate governance and competition policy.  Those presenting on the topic of Competition and Corporate Governance are: Marcello Bianchi, chair of the OECD Steering Group on Corporate Governance and Head of the Italian Regulation Impact Analysis Office, Economic Regulation Division (CONSOB); Professor Hugo Caneo, Universidad de Chile; Professor Daniel Sokol, University of Florida; Professor Spencer Weber Waller, Loyola University (Chicago); and Professor Yishay Yafeh, the Hebrew University.

Critical loss analysis in market definition and merger control

Posted by D. Daniel Sokol

Kai Hüschelrath (ZEW - Economics) explains Critical loss analysis in market definition and merger control.

ABSTRACT: The last couple of years have seen an increasing interest in critical loss analysis, both, in academia and in practice. This development is documented by various research papers, high-level exchanges between antitrust experts as well as an increasing number of case decisions which make use of some form of critical loss analysis. In this context, it is the aim of this article to describe the general method of critical loss analysis, to assess important properties of the concept, to show how critical loss analysis has to differ between market definition exercises and the evaluation of the competitive effects of horizontal mergers and to discuss applications of critical loss analysis in recent cases. The results suggest that the application of critical loss analysis in practice is often not as straightforward as the rather simple theoretical concept might suggest. In fact, the method has to be applied with great care in ord! er to receive meaningful results.

On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand

Posted by D. Daniel Sokol

Paul Zimmerman (FTC) provides his thoughts On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand.

ABSTRACT: In traditional industrial organization models of Bertrand supergames, the critical discount factor governing the sustainability of collusion is independent of key demand and supply parameters. Recent research has demonstrated that these counterintuitive results stem from the assumption that firms can change prices in infinitesimally small increments (i.e., continuously). This note considers the effects of demand curvature in the context of a model of collusion where, as in Gallice (2008), Bertrand competitors can deviate only by lowering prices by some small, discrete amount. Two alternative demand specifications that capture the influence of demand curvature are considered. In either case, it is shown that with discrete price changes the critical discount factor is determined by the key demand parameters, including demand curvature. However, the direct effects of increased concavity (or convexity) in market demand on th! e sustainability of collusion runs in opposite directions across the two models. This discrepancy is shown to arise from the way in which the respective demand curves rotate in response to a change in the demand curvature parameter. The results support the conclusion of earlier research that determining the potential for collusion in homogenous goods industries likely requires careful case-by-case investigation.

Quantum Model of Bertrand Duopoly

Posted by D. Daniel Sokol

Salman Khan, M. Ramzan, and M. K. Khan (all Department of Physics Quaid-i-Azam University Pakistan) explain Quantum Model of Bertrand Duopoly.

ABSTRACT: We present the quantum model of Bertrand duopoly and study the entanglement behaviour on the profit functions of the firms. Using the concept of optimal response of each firm to the price of the opponent, we found four Nash equilibria for maximally entangled initial state. We have shown that only one point among the four Nash equilibria has valid physical meaning. The very presence of quantum entanglement in the initial state gives payoffs higher to the firms than the classical payoffs at the physically valid point for higher values of substitution parameter.

Speech by new European Competition Commissioner Joaquín Almunia Lays out Vision

Posted by D. Daniel Sokol

He has communicated his vision for competition policy.  See here.

Are There Any Cournot Industries?

Posted by D. Daniel Sokol

David Flath (Institute of Social and Economic Research, Osaka University) asks Are There Any Cournot Industries?

ABSTRACT: For 70 Japanese manufacturing industries, I test the simple Cournot hypothesis of proportionality between industry price-cost margin and Herfindahl index against the non-nested alternative that the industry price-cost margin remains constant in the face of varying Herfindahl index, as it would under a simple product differentiated Bertrand framework. I then test each of these against the alternative hybrid specification that nests both of them, and from the pairwise tests, compute likelihoods of each specification. The simple Cournot specification is the most likely for five of the industries, the simple Bertrand specification for 35, and the hybrid specification for 30.

Competition Policy and Comparative Corporate Governance of State-Owned Enterprises

Posted by D. Daniel Sokol.

D. Daniel Sokol (University of Florida - Law) analyzes Competition Policy and Comparative Corporate Governance of State-Owned Enterprises.

ABSTRACT: The legal origins literature overlooks a key area of corporate governance - the governance of state-owned enterprises (“SOEs”). There are key theoretical differences between SOEs and publicly-traded corporations. In comparing the differences of both internal and external controls of SOEs, none of the existing legal origins allow for effective corporate governance monitoring. Because of the difficulties of undertaking a cross-country quantitative review of the governance of SOEs, this Article examines, through a series of case studies, SOE governance issues among postal providers. The examination of postal firms supports the larger theoretical claim about the weaknesses of SOE governance across legal origins. In itself, the lack of effective corporate governance would not be fatal if some of the SOE’s inefficient and societal-welfare-reducing behavior could be remedied under antitrust law. However, a review of antitrust decisions on the issue of predatory pricing by SOEs reveals that antitrust is equally ineffective in its attempts to monitor SOEs. This Article concludes by identifying a number of devices to reduce the current inadequacies of both antitrust and corporate governance of SOEs.

Dominance and Innovation

Posted by D. Daniel Sokol

Chander Velu (Cambridge - Judge School of Business) and Sriya Iyer (Cambridge - Econ) address Dominance and Innovation.

ABSTRACT: Do dominant or less dominant firms innovate more? Theoretically it has been shown that within an asymmetric mixed strategy game of a patent race, the less dominant firm invests more than the dominant firm. But the empirical data on patent races is divided. In this paper, we argue that the decisions that concern strategic choice in innovation may be influenced by expected relative returns. Our approach, which we call the returns-based beliefs approach, is based upon subjective probabilities. It combines a decision analytic solution concept and Luce’s (1959) probabilistic choice model. In particular, we show how the use of the returns-based beliefs approach provides support for the thesis that dominant firms invest more in R&D within an asymmetric mixed strategy game. Consequently, we argue that the returns-based beliefs approach is more in line with recent empirical studies of innovation. We also provide empirical e! vidence using UK R&D data across a range of industries from 2001-2006 that shows that firms’ spending on R&D is related more to their own profitability than that of their competitors, which is consistent with the returns-based beliefs approach. We discuss the managerial implications of our theoretical approach and the empirical findings.

Pricing in Matching Markets

Posted by D. Daniel Sokol

George J. Mailath (University of Pennsylvania), Andrew Postlewaite (University of Pennsylvania), and Larry Samuelson (Cowles Foundation, Yale University) examine Pricing in Matching Markets.

ABSTRACT: Different markets are cleared by different types of prices -- a universal price for all buyers and sellers in some markets, seller-specific prices that are uniform across buyers in others, and personalized prices tailored to both the buyer and the seller in yet others. We introduce the notion of premuneration values -- the values in the absence of any muneration (payments) -- created by the buyer-seller match. We characterize the premuneration values under which uniform-price and personalized-price equilibria agree. In this case, we have efficient allocations, including pre-match investment decisions, without the costs of personalized pricing. We then examine the inefficiencies that arise when the premuneration values preclude the agreement of uniform-price and personalized-price equilibria. We view premuneration values as an important consideration in market design.

The Relation between Competition and Innovation -- Why is it Such a Mess?

Posted by D. Daniel Sokol

Armin Schmutzler, University of Zurich - Socioeconomic Institute, asks The Relation between Competition and Innovation -- Why is it Such a Mess?

ABSTRACT: Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow definitions of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make a positive effects of competition on investment more likely. Extending the basic framework, the paper shows that separation of ownership and control, endogenous entry and cumulative investments make positive effects of competition on investment more likely. Imperfect upstream competition weakens the effects of competition on investment.

Antitrust in the Energy Sector Symposium Issue

Posted by D. Daniel Sokol

The Oil Gas Energy Law Intelligence Journal has published its symposium Antitrust in the Energy Sector.

Antitrust in the Energy Sector

Editorial

• OGEL Special Issue - Antitrust in the Energy Sector N. Petit, University of Liège

Antitrust in the Energy Sector

• Two New Precedents in the EU Natural Gas Markets - EU Competition Law and Network Foreclosure K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)

• Security of Supply Argument in the Context of EU Competition Law K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)

• Relationship Between General Competition Laws and Sector Specific Energy Regulation K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)
  P. Kuoppamäki, Nokia

• Sharing Data in the Energy Sector: What Companies Can, Cannot and Should Do Under Competition Law W. Vandenberghe, DLA Piper UK LLP (Brussels)

• The Emerging Strategy of the European Commission on Long-term Energy Supply Contracts: Is the New Methodology truly 'More Economic'? A. de Hauteclocque, Florence School of Regulation, European University Institute RSCAS

• Waiting for the Polish Trinko A. Stawicki, WKB Wiercinski, Kwiecinski, Baehr

• A Review of the Italian Competition Authority Commitment Decisions Regarding the Energy Sector M. Giannino, Desogus Law Office

• Key issues for the energy sector in the coordinated defence of parallel US/UK/international antitrust proceedings R.S. Lambert, Fulbright & Jaworski L.L.P.
  L.E. Kruse, Fulbright & Jaworski L.L.P.

• Nopec Goes Bananas: How the Supreme Court Will Thwart Congress's Attempt to Extend U.S. Antitrust Law's Extraterritorial Reach S. Looper, Dewey & LeBoeuf LLP

• The U.S. Petroleum Price Manipulation Rules: Cause for Concern? T.J. Cornell, Clifford Chance

• The More Things Change, The More they Stay the Same? Merger Review, the Canadian Oil and Gas Industry and the Year of Change A.S. Goodman, Heenan Blaikie
  C. Pigott, Heenan Blaikie

• Impact of Recent U.S. Competition Law Decisions on the Conduct of International Business Operations in the Energy Sector D. Anderson, Fulbright & Jaworski L.L.P
  J.B. Mitchell, Fulbright & Jaworski L.L.P

• Third-party Access Rights in the Energy Sector: A Competition Law Perspective A. Kotlowski, Faculty of Law, University of Oxford

• Interconnection Investment under the Competitive Electricity Market: The Case of Japan I. Matsukawa, Faculty of Economics, Musashi University

Did We Avoid Historical Failures of Antitrust Enforcement During the 2008-09 Financial Crisis?

Posted by D. Daniel Sokol

Dan Crane (Michigan Law) has posted Did We Avoid Historical Failures of Antitrust Enforcement During the 2008-09 Financial Crisis?

ABSTRACT: This introductory essay for a symposium on antitrust enforcement during economic crises provides a brief historical overview of the failures of antitrust enforcement during major economic crises and wars in the first half of the twentieth century. It then considers the reasons that historical narrative breaks off in the second half of the twentieth century and asks whether there is evidence of its revival during the recent economic crisis.

The Economics of Railroad “Captive Shipper” Legislation

Posted by D. Daniel Sokol

Russ Pittman (DOJ) has an interesting new work on The Economics of Railroad “Captive Shipper” Legislation.

ABSTRACT: Recent rate increases by U.S. freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Legislation introduced into Congress would render a variety of railroad behavior newly subject to the jurisdiction of the antitrust statutes, with potential enforcement by the Antitrust Division and the FTC and through lawsuits brought by state attorneys general or private parties. This paper considers the economic issues raised by legislation and the likely impacts on competition and welfare.  

Merger Remedies Versus Efficiency Defence: An Analysis of Merging Parties’ Litigation Strategy in EC Merger Cases

Posted by D. Daniel Sokol

Peter L. Ormosi, ESRC Centre for Competition Policy, University of East Anglia, has a paper on Merger Remedies Versus Efficiency Defence: An Analysis of Merging Parties’ Litigation Strategy in EC Merger Cases.

ABSTRACT: This paper contributes to the understanding of entrepreneurial motives in merger litigation by looking at how merging parties construct their litigation strategy in European Community merger procedures, given the environment determined by relevant merger legislations and the European Commission’s practice. The main focus of the paper is on two major questions in merger litigation strategy: whether to reveal efficiency related evidence to the Commission, and – if a remedy is offered – when to make that offer. As the regulatory framework and the Commission’s decision together determine the payoffs that any combination of litigation strategy leads to, companies are expected to design their strategy that helps them in achieving as early an approval as possible. Put differently, the paper is a test of how the Commission’s signals affect merging parties’ behaviour with regards to their decisions on remedy offers and efficiency claims. By analysing the Commission’s practice between 1999 and 2008, the paper examines empirically the determinants of the strategy that parties follow in individual merger cases.

 

Wrap up of Competition in Agriculture Blog Symposium

Posted by D. Daniel Sokol

I want to thank our contributors.  Below are links to the various posts:

Andy Novakovic (Cornell - Agriculture and Applied Economics)
Kyle Stiegert (University of Wisconsin, Agriculture and Applied Economics)
Scott Kieff (GW Law), Geoff Manne (Lewis & Clark Law), and Josh Wright (George Mason Law)
Peter Carstensen (University of Wisconsin Law)
Mike Sykuta (Agricultural and Applied Economics, University of Missouri-Columbia)
Jeff Harrison(University of Florida Levin College of Law)
Ron Cass (Chairman, Center for the Rule of Law and Dean Emeritus, Boston University School of Law)