Friday, July 16, 2010

When an inefficient firm makes higher profit than its efficient rival

Posted by D. Daniel Sokol

Debapriya Sen (Ryerson University) and Giorgos Stamatopoulos (University of Crete) explain When an inefficient firm makes higher profit than its efficient rival.

ABSTRACT: This paper considers a Cournot duopoly game with endogenous organization structures. There are two firms A and B who compete in the retail market, where A is more efficient than B. Prior to competition in the retail stage, firms simultaneously choose their organization structures which can be either 'centralized' (one central unit chooses quantity to maximize firm's profit) or 'decentralized' (the retail unit chooses quantity to maximize firm's revenue while the production unit supplies the required quantity). Identifying the (unique) Nash Equilibrium for every retail-stage subgame, we show that the reduced form game of organization choices is a potential game. The main result is that with endogenous organization structures, situations could arise where the less efficient firm B obtains a higher profit than its more efficient rival A.

July 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, July 15, 2010

Patent Pools as a Solution to Efficient Licensing of Complementary Patents? Some Experimental Evidence

Posted by D. Daniel Sokol

Rudy Santore (University of Tennessee), Michael McKee (Appalachian State University) and David Bjornstad (Oak Ridge National Laboratory) discuss Patent Pools as a Solution to Efficient Licensing of Complementary Patents? Some Experimental Evidence.

ABSTRACT: Production requiring licensing groups of complementary patents implements a coordination game among patent holders, who can price patents by choosing among combinations of fixed and royalty fees. Summed across patents, these fees become the total producer cost of the package of patents. Royalties, because they function as excise taxes, add to marginal costs, resulting in higher prices and reduced quantities of the downstream product and lower payoffs to the patent holders. Using fixed fees eliminates this inefficiency but yields a more complex coordination game in which there are multiple equilibria, which are very fragile in that small mistakes can lead the downstream firm to not license the technology, resulting in inefficient outcomes. We report on a laboratory market investigation of the efficiency effects of coordinated pricing of patents in a patent pool. We find that pool‐like pricing agreements can yield fewer coordination failures in the pricing of complementary patents.

July 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Product Line Pricing in a Vertically Differentiated Oligopoly

Posted by D. Daniel Sokol

George Deltas (Department of Economics, University of Illinois, U.-C., United States), Thanasis Stengos (Department of Economics, University of Guelph, Canada), and Eleftherios Zacharias (Department of Economics, Athens School of Economics, Greece) discuss Product Line Pricing in a Vertically Differentiated Oligopoly.

ABSTRACT: This paper empirically examines the joint pricing decision of products in a firm's product line. When products are distinguished by a vertical characteristic, those products with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is a price premium for products on the industry and/or the firm frontier, i.e., for the products with the highest value of the characteristic in the market or in a firm's product line. The existence of price premia for lower ranked products is also investigated. Finally, the paper investigates whether firms set prices to avoid cannibalizing the other products in their portfolio, whether competition with rival firms is stronger for products that are closer to the frontier compared to other products, and whether a product's price declines with the time it is ownered by a firm. Using personal computer pric! e data, we show that prices decline with the distance from the industry and firm frontiers. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). Finally, there is evidence that a product's price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm's offerings constant), possibly as an attempt way to reduce cannibalization.

July 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Can We Protect Competition Without Protecting Consumers?

Posted by D. Daniel Sokol

Oles Andriychuk (University of East Anglia) asks Can We Protect Competition Without Protecting Consumers?

ABSTRACT: This paper suggests that an interpretation of competition solely as a means to increase consumer welfare eliminates substantial characteristics from competition as a process, depriving competition from its original meaning. It is misleading to define competition by evaluating its external role on the economy. This role is important only from the perspective of performance. From the ontological view however it is irrelevant. Some forms of competition are good or beneficial others are considered as harmful or undesirable, but in both cases we talk about different features of the same phenomenon. The idea that ‘competition has to bring positive outcomes for economy, otherwise it is not competition’ is logically incorrect. It is impossible to qualify the essence of object only by exploring its external effects. The paper concludes that competition itself deserves its protection even in circumstances when it does not lead to efficiency gains. In this respect competition can be seen as a ‘luxury product’ of market-oriented societies, which is not indispensable for achieving such values as industrial growth, market integration, social coherency, consumer welfare or innovations.

July 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Advanced Agency & Distribution 2010

Posted by D. Daniel Sokol

With the complexity of agency and distribution agreements and relationships increasingly being manifested in significant legal and regulatory developments, join us this October for IBC Legal’s cutting-edge one day event Advanced Agency and Distribution and enhance your knowledge of distribution law.

Designed for lawyers and businessmen involved in agency, distributorship, licensing and franchising, this conference will review the legal and commercial differences between agents and distributors as well as their rights and obligations.

Joining your expert chairman Simon Holmes, Head of EU & Competition, SJ Berwin LLP will be a wealth of speakers, including:

  • Jackie Holland, Director of Competition Policy, OFT, London
  • Regula Walter, Head of Legal, E-Commerce & Antitrust, Richemont International SA, Geneva
  • Antonio Capobianco, Senior Competition Law Expert, Competition Division, OECD, Paris

For more on all the speakers in 2010, simply view the Advanced Agency & Distribution line-up.

Managing today’s commercial and competition law challenges on and offline is as challenging as ever and this year’s event not only aims to bring you up to speed with the latest developments but assesses real-life problems in the afternoon case study to enhance your skills and strategies. Key areas of focus include:

  • Definitions and interpretations
  • Agency, distribution and licensing agreements  
  • Doing business online
  • Category management 
  • Information exchange
  • Competition law considerations and risks

Want to know more? For all topics and information on the event and the interactive afternoon session, please view the Advanced Agency & Distribution 2010 brochure today.

Remember to book by the 20th August in order to save £200! Book online today.

Plus attend this event to receive free membership* for 2010 to the Competition Law Association (CLA)!

July 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Bundling and Compatibility: Selling the Whole Package May Be Pro-Competitive

Posted by D. Daniel Sokol

Matteo Alvisi, University of Bologna - Department of Economics and Emanuela Carbonara, University of Bologna - Department of Economics explain Bundling and Compatibility: Selling the Whole Package May Be Pro-Competitive.

ABSTRACT: In this paper we study price competition, equilibrium market configurations and entry decisions when firms compete in vertically-differentiated markets producing complementary goods. We show that allowing firms to sell complementary goods may be welfare-enhancing and pro-competitive. In fact, such strategy favors the entry of new firms producing lower-quality components. Moreover, this strategy increases consumer surplus, even when firms sell the two complements as a bundle. Interestingly, notwithstanding the increase in competition, it is always optimal for firms to enter a complementary good market. By discouraging such practices, antitrust authorities may harm both consumers and low-quality firms, at the same time undermining market stability.

July 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 14, 2010

WSJ Op-Ed Against the Hong Kong Competition Law

Posted by D. Daniel Sokol

I have not read the Hong Kong draft law and so I cannot comment as to the specifics on the law.  However, this op-ed that appeared in the Wall Street Journal titled Competition Law and (Dis)order seems to lack a basic understanding of competition law and economics and takes broad swipes at antitrust more generally.  The reason why trade open economies have competition laws is because the non-tradable sectors may have lots of cartels and lots of abuse of dominance problems. Even if you are a libertarian (which the op-ed author seems to be), you should recognize that a naked cartel hurts consumers and that the possibility of false positives for such cartels is very low.

From what I can tell, the relatively new Singapore Competition Commission has done exceptionally well in its short existence. You do not see businesses fleeing Singapore because of the competition law.

July 14, 2010 | Permalink | Comments (5) | TrackBack (0)

Going Beyond the Conventional Wisdom on Whether Merger-Related Cost Savings Will Benefit Customers

Posted by D. Daniel Sokol

Michael Baye (IU Bloomington - Kelley School of Business) and Graeme Hunter (NERA) discuss Going Beyond the Conventional Wisdom on Whether Merger-Related Cost Savings Will Benefit Customers.

ABSTRACT: The motivation for many proposed mergers and acquisitions is the potential to reduce operating costs or to improve product quality, customer service, or the rate of innovation. Although the prospect of efficiencies may explain why the merging parties want to merge, what determines whether consumers are likely to benefit as well? This paper examines the conventional wisdom that reductions in marginal costs will be passed through to consumers in the form of lower prices. They explain how and why a given reduction in marginal cost may or may not lead to a drop in price. The market factors that may determine the outcome include the nature of consumer demand and the dynamics of competition in the market served by the merged firm.

Download Antitrust_Insights_Spring_2010[1]

July 14, 2010 | Permalink | Comments (0) | TrackBack (0)

Market concentration measures and investment decisions in Mexican manufacturing firms

Posted by D. Daniel Sokol

Celina Lopez-Mateo and Antonio Ruiz-Porras (both University of Guadalajara) have posted Market concentration measures and investment decisions in Mexican manufacturing firms.

ABSTRACT: We study how alternative measures of market concentration may explain investment decisions of Mexican manufacturing firms. The measures include the Herfindahl-Hirschman Index and the Dominance one. The first one is the traditional measure of market structure concentration. The Dominance Index is a competition measure used by Mexican regulators. The econometric assessments suggest that investment decisions of Mexican firms can be better explained by the Dominance Index measure than by the Herfindahl-Hirschman one. Thus our results suggest that the Mexican Dominance Index might be useful as a measure of market structure and competition. Such conclusion is based on several econometric assessments. In all cases we use certain characteristics of the firms (size, cash flows, investment opportunities and capital intensity) as control variables.

July 14, 2010 | Permalink | Comments (0) | TrackBack (0)

Competition Issues in the Seed Industry and the Role of Intellectual Property

Posted by D. Daniel Sokol

GianCarlo Moschini (Iowa - Econ) has an interesting new piece on Competition Issues in the Seed Industry and the Role of Intellectual Property.

ABSTRACT: Research and Development (R&D) and innovation are crucial features of the seed industry. To support large R&D investments by the private sector, strong intellectual property rights, such as patents, are necessary. The exclusivity granted by patents naturally creates market power positions and raises difficult and unresolved competition issues in an antitrust context. 

July 14, 2010 | Permalink | Comments (0) | TrackBack (0)

Innovation, Competition And Consumer Welfare In Intellectual Property Law

Posted by D. Daniel Sokol

Gustavo Ghidini, Professor of Intellectual Property and Competition Law, University of Milan and Director, Observatory on Intellectual Property, Competition and Communications Law, LUISS Guido Carli University, Rome, Italy has just published Innovation, Competition And Consumer Welfare In Intellectual Property Law.

BOOK ABSTRACT: This authoritative book provides a comprehensive critical overview of the basic IP paradigms, such as patents, trademarks and copyrights. Their intersection with competition law and their impacts on the exercise of social welfare are analysed from an evolutionary perspective.

The analyses and proposals presented encompass the features and rationales of a legal field in constant evolution, and relate them to increasingly rapid technological, economic, social and geo-political developments. Gustavo Ghidini highlights the emerging trends that challenge the traditional ‘all-exclusionary’ vision of IP law and its application. The author expertly combines holistic, evolutionary and constitutionally oriented approaches, with the search for a rebalancing of the IP rights holders’ positions with citizens’ and users’ rights.

July 14, 2010 | Permalink | Comments (0) | TrackBack (0)

Health insurance competition: the effect of group contracts

Posted by D. Daniel Sokol

Jan Boone (Department of Economics, CentER, Tilec, Tilburg University), Carline Droge (CPB Netherlands Bureau for Economic Policy Analysis), Ilaria Mosca (Sint Fransiscus Gasthuis), and Rudy Douven (Dutch Healthcare Authority and TILEC) examine Health insurance competition: the effect of group contracts.

ABSTRACT: In countries like the US and the Netherlands health insurance is provided by private firms. These private firms can offer both individual and group contracts. The strategic and welfare implications of such group contracts are not well understood. Using a Dutch data set of about 700 group health insurance contracts over the period 2007-2008, we estimate a model to determine which factors explain the price of group contracts. We find that groups that are located close to an insurers’ home turf pay a higher premium than other groups. This finding is not consistent with the bargaining argument in the literature as it implies that concentrated groups close to an insurer’s home turf should get (if any) a larger discount than other groups. A simple Hotelling model, however, does explain our empirical results.

July 14, 2010 | Permalink | Comments (2) | TrackBack (0)

Tuesday, July 13, 2010

Strategic Behavious of Firms in a Duopoly and the Impact of Extending the Patenting Period

Posted by D. Daniel Sokol

Jolian McHardy (Department of Economics, The University of Sheffield) have a new paper on Strategic Behavious of Firms in a Duopoly and the Impact of Extending the Patenting Period.

ABSTRACT: This paper deals with strategic behaviour of firms in a duopoly, subsequent to the claim by one firm that it has reduced the unit cost of production. A variety of possible strategic equilibria are discussed in the context of a duopoly game between a multinational and a local firm. In the context of an extended uniform period of patenting, as finally agreed in the Uruguay round (1994), firms have increased incentive to take patents. In the presence of cost differences, the act of taking process-patents has implications for the equilibrium output strategies of the duopoly firms and sometimes may have a negative overall welfare effect for the local producer and consumers.

July 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Do Antitrust Agencies Facilitate Meetings in Smoke-Filled Rooms?

Posted by D. Daniel Sokol

Bos Iwan, Peeters Ronald, Pot Erik (all METEOR) ask the provacative question Do Antitrust Agencies Facilitate Meetings in Smoke-Filled Rooms?

ABSTRACT: The theory of industrial collusion generally does not distinguish between tacit and explicit collusion. We show that if tacit collusion is not sustainable, firms may still be willing and able to collude explicitly when demand is viscous, the expected antitrust penalty is limited and antitrust agencies are sufficiently effective in detecting and prosecuting cartels.

July 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Optimal Price Setting with Observation and Menu Costs

Posted by D. Daniel Sokol

Fernando Alvarez (University of Chicago), Francesco Lippi (University of Sassari, EIEF), and Luigi Paciello (EIEF) discuss Optimal Price Setting with Observation and Menu Costs.

ABSTRACT: We study the price setting problem of a firm in the presence of both observation and menu costs. In this problem the firm optimally decides when to collect costly information on the adequacy of its price, an activity which we refer to as a price “review”. Upon each review, the firm chooses whether to adjust its price, subject to a menu cost, and when to conduct the next price review. This behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment. The goal of the paper is to study how the firm’s choices map into several observable statistics, depending on the level and relative magnitude of the observation vs the menu cost. The observable statistics are: the frequency of price reviews, the frequency of price adjustments, the size-distribution of price adjustments, and the shape of the hazard rate of price adjustme! nts. We provide an analytical characterization of the firm’s decisions and a mapping from the structural parameters to the observable statistics. We compare these statistics with the ones obtained for the models with only one type of cost. The predictions of the model can, with suitable data, be used to quantify the importance of the menu cost vs. the information cost. We also consider a version of the model where several price adjustment are allowed between observations, a form of price plans or indexation. We find that no indexation is optimal for small inflation rates.

July 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, July 12, 2010

Relative and Absolute Preference for Quality

Posted by D. Daniel Sokol

Constantine Angyridis and Debapriya Sen (both Ryerson University) describe Relative and Absolute Preference for Quality.

ABSTRACT: This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.

July 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Bundling without Price Discrimination

Posted by D. Daniel Sokol

Andrés Carvajal (Department of Economics, University of Warwick), Marzena Rostek (Department of Economics, University of Wisconsin-Madison), and Marek Weretka (Department of Economics, University of Wisconsin-Madison) offer the possibility of Bundling without Price Discrimination.

ABSTRACT: This paper examines the optimal bundling strategies of a multiproduct monopoly in markets in which a seller cannot monitor and thereby restrict the purchases of buyers to a single bundle, while buyers have resale opportunities. In such markets, the standard mechanism through which bundling increases seller profits, based on price discrimination, is not feasible. The profit-maximizing bundling strategy is characterized, given the restrictions on pricing policies resulting from resale and a lack of monitoring. The welfare implications of optimal bundling are analyzed. 

July 12, 2010 | Permalink | Comments (0) | TrackBack (0)

The strategic effect of bundling: a new perspective

Posted by D. Daniel Sokol

Andrea Mantovani (Department of Economics, University of Bologna) discusses The strategic effect of bundling: a new perspective.

ABSTRACT: This paper investigates the strategic effect of bundling when a multi-product firm producing two complements faces competition in both markets. I consider a demand structure where both Cournot and Bertrand competition can be evaluated. Bundling is completely ineffective when firms compete in quantities. On the contrary, under Bertrand competition, selling the two goods in a package is profitable when the goods produced by the rivals are perceived as close substitutes to those produced by the multi-product firm. Bundling drives prices up, and not only consumer surplus, but also social welfare shrinks, thus calling for the intervention of the antitrust agency.

July 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Buyer Power in Health Plan Mergers

Posted by D. Daniel Sokol

Cory S. Capps, Bates White, LLC has a forthcoming article on Buyer Power in Health Plan Mergers.

ABSTRACT: In light of recent increased policy attention directed toward health insurance, the next significant health plan merger is almost certain to receive close scrutiny from many quarters, including representatives of providers, such as the American Medical Association and the American Hospital Association, and the U.S. Department of Justice. In this paper, I review the key buy-side economic questions and analytic frameworks that are likely to be at the forefront in future investigations of health plan mergers. In particular, I explain how industry structure implies that shares of purchases from individual providers as well as area-wide shares of purchases are likely to inform antitrust analysis of potential monopsony harm in health plan mergers. I also discuss the appropriate treatment of government payers in calculating and assessing buy-side market shares. I conclude with a discussion of how competition and market power in downstream markets for the sale of commercial insurance interact with the potential exercise of monopsony power in upstream markets for the purchase of provider services.

July 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Sunday, July 11, 2010

MOFCOM released provisional regulations on the handling of divestiture of assets to comply with a merger approval

Posted by D. Daniel Sokol

MOFCOM released provisional regulations on the handling of divestiture of assets to comply with a merger approval.  See here.

HT: Paul Jones

7/12/10 Update: Beth Farmer has provided an unofficial translation.  See the attachment below.

Download New MOFCOM Rules Translation

July 11, 2010 | Permalink | Comments (0) | TrackBack (0)