Antitrust & Competition Policy Blog

A “Principled” Approach to the Design of Telecommunications Policy

Posted by D. Daniel Sokol

Dennis Weisman (Kansas State) provides A “Principled” Approach to the Design of Telecommunications Policy.

ABSTRACT: The Obama administration came into power championing a philosophical shift in regulatory and antitrust policy. The telecommunications industry was singled out by the administration as a case where past regulatory/antitrust policies may have been too permissive. Prominent policy issues slated for (re)examination include forbearance from network unbundling obligations, net neutrality regulation and prospective market failures in the provision of broadband. The principal objective of this article is to develop a set of competition and regulatory principles, firmly grounded in the law and economics literature, that can serve to inform the design of the optimal public policy for the telecommunications sector.

Revising the Horizontal Merger Guidelines

Posted by D. Daniel Sokol

Dennis Carlton of the University of Chicago Booth Graduate School of Business has a forthcoming paper worth reading on Revising the Horizontal Merger Guidelines.

ABSTRACT: The U.S. Department of Justice and the Federal Trade Commission are currently in the process of revising their Horizontal Merger Guidelines. I explain that if a revision is to occur, then there are certain parts of the Guidelines that are most in need of revision, including the sections on unilateral and coordinated effects, committed and uncommitted entry, numerical concentration thresholds for safe harbors, and fixed costs. I also explain what should not become part of any new Guidelines, such as replacing the market definition/market concentration starting point with a competitive effects framework such as "upward pricing pressure." The proposed Guidelines were published in April 2010. I present my reactions to the proposed Guidelines and discuss several caveats that courts, foreign antitrust agencies, and the business community should be aware of as they try to interpret what the proposed Guidelines suggest about appropriate antitrust policy.

Competition Law Enforcement in the Television Broadcasting Sector in Hong Kong: Past Cases and Recent Controversies

Posted by D. Daniel Sokol

Thomas K. Cheng, University of Hong Kong - Law has posted Competition Law Enforcement in the Television Broadcasting Sector in Hong Kong: Past Cases and Recent Controversies.

ABSTRACT: This article reviews the competition law regime in the television broadcasting sector in Hong Kong. This regime governs one of the only two sectors in Hong Kong subject to competition law enforcement until the government promulgates a cross-sector competition law. The article begins with an overview of the state of competition in the sector, highlighting trends in recent development that are relevant to competition law enforcement. This is followed by an examination of the two main competition provisions in the Broadcasting Ordinance and the guidelines issued by the Broadcasting Authority, the sectoral regulator. It argues that one of the greatest flaws in the provisions is their designation of the downstream market as the relevant market, hence exacerbating the limitations of a sectoral regime. The article continues with a critical review of the existing decisional practices, focusing on the regulator’s treatment of market definition, predatory pricing, and causation. It argues that the regulator has largely failed to apply rigorous analysis to these issues and has adopted an overly stringent standard for causation. It concludes with an analysis of a recent controversy in the sector - the dominant terrestrial broadcaster’s alleged imposition of exclusivity on artists, which prevent these artists from appearing on rival channels.

Slotting Allowances and Scarce Shelf Space

Posted by D. Daniel Sokol

Leslie M. Marx, Duke University - Fuqua School of Business, Economics Group and Greg Shaffer, University of Rochester - Simon Graduate School of Business have an interesting paper on Slotting Allowances and Scarce Shelf Space.

ABSTRACT: Slotting allowances are payments made by manufacturers to obtain retail shelf space. They are widespread in the grocery industry and a concern to antitrust authorities. A popular view is that slotting allowances arise because there are more products than retailers can profitably carry given their shelf space. We show that the causality can also go the other way: the scarcity of shelf space may in part be due to the feasibility of slotting allowances. It follows that slotting allowances can be anticompetitive even if they have no effect on retail prices.

 

LL.M. in Competition Law - What Program to Choose?

Posted by D. Daniel Sokol

There is a discussion of LLM competition law programs at the LLM Guide website.  Aaron Edlin (Berkeley) and Ioannos Lianos (UCL) offer their analysis as to why the field is hot and what students should consider in a program.

Estimating the Economic Impact of Mass Digitization Projects on Copyright Holders: Evidence from the Google Book Search Litigation

Posted by D. Daniel Sokol

Hannobal Travis (FIU - Law) offer his thoughts on Estimating the Economic Impact of Mass Digitization Projects on Copyright Holders: Evidence from the Google Book Search Litigation.

ABSTRACT: Google Book Search (GBS) has captured the attention of many commentators and government officials, but even as they vigorously debate its legality, few of them have marshaled new facts to estimate its likely effects on publishing and other information markets. This Article challenges the conventional wisdom propounded by the U.S. and German governments, as well as Microsoft and other competitors of Google, concerning the likely economic impact of mass book-digitization projects. Originally advanced by publishing industry lobbying groups, the prevailing account of mass book-digitization projects is that they will devastate authors and publishers, just as Napster and its heirs have supposedly devastated musicians and music labels. Using the impact of GBS on the revenues and operating incomes of U.S. publishers believing themselves to be the most-affected by it, this Article finds no evidence of a negative impact upon them. To the contrary, it provides some evidence of a positive impact, and proposes further empirical research to identify the mechanisms of digitization’s economic impact.

The debate surrounding the GBS settlement is important to students, writers, researchers, and the general public, as it may decide whether a federal appellate court or even the U.S. Supreme Court allows the best research tool ever designed to survive. If the theory of Microsoft and some publishing trade associations is accepted, the courts may enjoin and destroy GBS, just as Napster was shut down a decade ago.

The Article aims at a preliminary estimate of the economic impact of mass digitization projects, using GBS as a case in point. It finds little support for the much-discussed hypothesis of the Association of American Publishers and Google’s competitors that the mass digitization of major U.S. libraries will reduce the revenues and profits of the most-affected publishers. In fact, the revenues and profits of the publishers who believe themselves to be most aggrieved by GBS, as measured by their willingness to file suit against Google for copyright infringement, increased at a faster rate after the project began, as compared to before its commencement. The rate of growth by publishers most affected by GBS is greater than the growth of the overall U.S. economy or of retail sales. Thus, the very publishers that have sued Google have seen their revenues grow faster than retail sales or the U.S. economy as a whole (measured by gross domestic product). This finding parallels some of the research that has been done since the Napster case on the economic impact of peer-to-peer file sharing on sales of recorded music. Future studies may provide a more granular estimate of the economic impact of frequent downloads or displays of pages of particular books on the sales of such books.

The Penguin and the Cartel: Rethinking Antitrust and Innovation Policy for the Age of Commercial Open Source

Posted by D. Daniel Sokol

Steohen Maurer (Berkeley - Goldman School of Public Policy) has a new paper on  The Penguin and the Cartel: Rethinking Antitrust and Innovation Policy for the Age of Commercial Open Source.

ABSTRACT: Modern open source (“OS”) software projects are increasingly funded by commercial firms that expect to earn a profit from their investment. This is usually done by bundling OS software with proprietary goods like cell phones or services like tech support. This article asks how judges and policymakers should manage this emerging business phenomenon. It begins by examining how private companies have adapted traditional OS institutions in a commercial setting. It then analyzes how OS methods change companies’ willingness to invest in software. On the one hand, OS cost-sharing often leads to increased output and benefits to consumers. On the other, these benefits tend to be limited. This is because sharing guarantees that no OS company can offer consumers better software than any other OS company. This suppresses incentives to invest much as a formal cartel would. In theory, vigorous competition from non-OS companies can mitigate this effect and dramatically increase OS output. In practice, however, de facto cartelization usually makes the OS sector so profitable that relatively few proprietary companies compete. This poses a central challenge to judges and policymakers.

Antitrust law has long recognized that the benefits of R&D sharing frequently justify the accompanying cartel effect. This article argues that most commercial OS collaborations can similarly be organized in ways that satisfy the Rule of Reason. It also identifies two safe harbors where unavoidable cartel effects should normally be tolerated. That said, many OS licenses contain so-called “viral” clauses that require users who would prefer to develop proprietary products to join OS collaborations instead. These clauses aggravate the cartel effect by further reducing the number of companies willing to adopt proprietary business models. Although viral licenses may sometimes be needed to stabilize OS collaborations against free-riding, practical experience suggests that many viral licenses (notably including the GPL) are too broad to survive a Rule of Reason analysis. The article concludes by asking how policymakers can use taxes and government spending to mitigate the cartel effect and/or increase OS software production.

Broadband Openness Rules Are Fully Justified by Economic Research

Posted by D. Daniel Sokol

Nic Economides (NYU - Stern) argues that Broadband Openness Rules Are Fully Justified by Economic Research.

ABSTRACT: This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the ! absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative. Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.

SOEs in China and Their Impact on Private Businesses

Posted by D. Daniel Sokol

This weekend I read an excellent work in progress by Wentong Zheng (University of Buffalo Law) on the Chinese AML and SOEs.  It should go out to the law reviews soon.  SOEs has been a topic of interest of mine for some time in terms of both governance and competition concerns.  Today's NY Times has a long story about the competitive impact of SOEs on private businesses, lending support to how a raising rival's cost strategy is rational for state owned firms who lack hard budget constraints.

Who gains and who loses from credit card payments?: theory and calibrations

Posted by D. Daniel Sokol

Scott Schuh, Oz Shy, Joanna Stavins (all Federal Reserve Bank of Boston) explain Who gains and who loses from credit card payments?: theory and calibrations.

ABSTRACT: Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card! rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.

SSRN TOP 10 Papers for Journal of Antitrust: Antitrust Law & Policy eJournal June 30, 2010 to August 29, 2010

Posted by D. Daniel Sokol

RECENT HITS (for all papers announced in the last 60 days)
TOP 10 Papers for Journal of Antitrust: Antitrust Law & Policy eJournal
June 30, 2010 to August 29, 2010

Rank	Downloads	Paper Title
1	322	Estimating the Economic Impact of Mass Digitization Projects on Copyright Holders: Evidence from the Google Book Search Litigation Hannibal Travis, Florida International University College of Law, Date posted to database: July 5, 2010 Last Revised: August 2, 2010
2	210	Reconsidering Competition and the Goals of Competition Law Maurice E. Stucke, University of Tennessee College of Law, Date posted to database: July 22, 2010 Last Revised: July 22, 2010
3	193	Explaining the Importance of Public Choice for Law D. Daniel Sokol, University of Florida - Levin College of Law, Date posted to database: June 16, 2010 Last Revised: June 30, 2010
4	183	European Competition Law & Control of Energy Market Restructuring Michael D. Diathesopoulos, University of Cambridge - Faculty of Law, Date posted to database: June 24, 2010 Last Revised: July 19, 2010
5	175	When a Monopolist Deceives Maurice E. Stucke, University of Tennessee College of Law, Date posted to database: July 18, 2010 Last Revised: July 18, 2010
6	170	European Energy Market After Deregulation: A Process of Limited Restructuring and the Role of European Competition Law Michael D. Diathesopoulos, University of Cambridge - Faculty of Law, Date posted to database: June 24, 2010 Last Revised: July 20, 2010
7	124	An Evaluation of the Rights of Defense During Antitrust Inspections In the Light of the Case Law of the ECTHR: Would the Accession of the European Union to the ECHR Bring About a Significant Change? Charlotte Leskinen, Instituto de Empresa, Date posted to database: May 29, 2010 Last Revised: May 29, 2010
8	124	The Coming of Age of EU Regulation of Network Industries and Services of General Economic Interest Leigh Hancher, Pierre Larouche, Tilburg University - Tilburg Law and Economics Center (TILEC), Tilburg University, Date posted to database: June 24, 2010 Last Revised: June 24, 2010
9	114	From Energy Sector Inquiry to Recent Antitrust Decisions in European Energy Markets: Competition Law as a Means to Implement Sector Regulation Michael D. Diathesopoulos, University of Cambridge - Faculty of Law, Date posted to database: July 15, 2010 Last Revised: July 15, 2010
10	111	The Firm as Cartel Manager Christopher R. Leslie, Herbert J. Hovenkamp, University of California, Irvine - School of Law, University of Iowa - College of Law, Date posted to database: June 21, 2010 Last Revised: August 17, 2010

The impact of competition on technology adoption: an apples-to-PCs analysis

Posted by D. Daniel Sokol

Adam Copeland and Adam Hale Shapiro describe The impact of competition on technology adoption: an apples-to-PCs analysis.

ABSTRACT: We study the effect of market structure on a personal computer manufacturer’s decision to adopt new technology. This industry is unusual because there exist two horizontally segmented retail markets with different degrees of competition: the IBM-compatible (or PC) platform and the Apple platform. We first document that, relative to Apple, producers of PCs typically have more frequent technology adoption, shorter product cycles, and steeper price declines over the product cycle. We then develop a parsimonious vintage-capital model that matches the prices and sales of PC and Apple products. The model predicts that competition is the key driver of the rate at which technology is adopted

Managerial Incentives and Stackelberg Equilibria in Oligopoly

Posted by D. Daniel Sokol

Marcella Scrimitore (University of Salento) has written on Managerial Incentives and Stackelberg Equilibria in Oligopoly.

ABSTRACT: The paper investigates both quantity and price oligopoly games in markets with a variable number of managerial and entrepreneurial firms which defines market structure. Following Vickers (Economic Journal, 1985) which establishes an equivalence between the equilibrium under unilateral delegation and the Stackelberg quantity equilibrium, the outcomes of these games are compared with the ones in sequential multi-leaders and multi-followers games. The profitability of a managerial/entrepreneurial attitude vs leadership/followership is shown to critically depend upon the kind of strategy, price or quantity, and upon the assumed market structure. Indeed, the latter turns out to be crucial in determining the equivalence result that is shown to be contingent on the assumption that just one leader or one managerial firm operate in the market. A welfare analysis finally highlights the differences between the delegation and the se! quential games, focusing on the impact of market structure and imperfect substitutability on the equilibria of the two games.

Joint Defense or Research Joint Venture? Reassessing the Patent-Challenge-Bloc's Antitrust Status

Posted by D. Daniel Sokol

Joseph Scott Miller (Lewis & Clark Law) has posted Joint Defense or Research Joint Venture? Reassessing the Patent-Challenge-Bloc's Antitrust Status.

ABSTRACT: A patent challenger who defeats a patent wins spoils that it must share with the world, including all its competitors. This forced sharing undercuts an alleged infringer's incentive to stay in the fight to the finish - especially if the patent owner offers an attractive settlement. Too many settlements, and too few definitive patent challenges, are the result. I have argued previously that a litigation-stage bounty would help correct this tilt against patent challenges, for it would provide cash prizes to successful patent challengers that they alone would enjoy. Even the best-designed bounty, however, would likely fail to encourage patent validity challenges in all the cases where such encouragement would be salutary. Others have urged that, going forward, post-grant administrative review is a more promising approach to weeding out weak patents. A new post-grant review procedure, however, will do nothing to encourage worthy challenges to thousands of extant weak, overasserted patents.

This article explores another litigation-stage approach to overcoming the free rider problem that undercuts patent validity challenges - namely, strong-form joint defense agreements among multiple accused infringers. Strong-form agreements, which go beyond light coordination and information sharing, have long been condemned as unlawful buyers' cartels. The seminal case remains Jones Knitting Corp. v. Morgan. But current doctrine’s condemnation trades on a category mistake rooted in a fatally simplistic view that patents are commodity property (rather than what they are, which is probabilistic exclusion rights). Contrary to conventional wisdom, a binding commitment among accused infringers jointly to fund a full challenge to patent infringement allegations is not, nor is it akin to, a buyers’ cartel for buying commodities. Rather, it is a research joint venture, the goal of which is to generate valuable - but otherwise inappropriable - information about the patent's true validity or scope.

Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions

Posted by D. Daniel Sokol

Katja Seim (Wharton) and Joel Waldfogel (Wharton) have a paper on Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions.

ABSTRACT: While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.

Death by Market Power. Reform, Competition and Patient Outcomes in the National Health Service

Posted by D. Daniel Sokol

Martin Gaynor (Carnegie Mellon University and University of Bristol), Rodrigo Moreno-Serra (Imperial College), and Carol Propper (Imperial College, University of Bristol) have a new paper on Death by Market Power. Reform, Competition and Patient Outcomes in the National Health Service.

ABSTRACT: The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from non experimental data. In contrast, this paper exploits a pro-competitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Patients were given choice of location for hospital care and provided information on the quality and timeliness of care. Prices, previously negotiated between buyer and seller, were set centrally under a DRG type system. Using this policy to implement a difference-in-differences research design we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. Our data set is large, containing information on approximately 68,000 discharges per year per hospital from 160 hospitals. We find that the effect of competition is to save lives without raising costs. Patients discharged from hospitals located in markets where competition was more feasible were less likely to die, had shorter length of stay and were treated at the same cost.

The Impact of Competition on Management Quality: Evidence from Public Hospitals

Posted by D. Daniel Sokol

Nicholas Bloom, Carol Propper, Stephan Seiler, and John van Reenan (all Centre for Market and Public Organisation Bristol Institute of Public Affairs University of Bristol) explore The Impact of Competition on Management Quality: Evidence from Public Hospitals.

ABSTRACT: In this paper we examine the causal impact of competition on management quality. We analyze the hospital sector where geographic proximity is a key determinant of competition, and English public hospitals where political competition can be used to construct instrumental variables for market structure. Since almost all major English hospitals are government run, closing hospitals in areas where the governing party has a small majority is rare due to fear of electoral punishment. We find that management quality - measured using a new survey tool - is strongly correlated with financial and clinical outcomes such as survival rates from emergency heart attack admissions (AMI). More importantly, we find that higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument the number of local hospitals ! with local political competition. Adding another rival hospital increases the index of management quality by one third of a standard deviation and leads to a 10.7% reduction in heart-attack mortality rates.

Horizontal Mergers of Online Firms: Structural Estimation and Competitive Effects

Posted by D. Daniel Sokol

Yonghong An, Michael R. Baye, Yingyao Hu, John Morgan, and Matt Shum have an interesting new paper on Horizontal Mergers of Online Firms: Structural Estimation and Competitive Effects.

ABSTRACT: This paper (1) presents a general model of online price competition, (2) shows how to structurally estimate the underlying parameters of the model when the number of competing firms is unknown or in dispute, (3) estimates these parameters based on UK data for personal digital assistants, and (4) uses these estimates to simulate the competitive effects of horizontal mergers. Our results suggest that competitive effects in this online market are more closely aligned with the simple homogeneous product Bertrand model than might be expected given the observed price dispersion and number of firms. Our estimates indicate that so long as two firms remain in the market post merger, the average transaction price is roughly unaffected by horizontal mergers. However, there are potential distributional effects; our estimates indicate that a three-to-two merger raises the average transaction price paid by price sensitive "shoppers" b! y 2.88 percent, while lowering the average transaction price paid by consumers "loyal" to a particular firm by 1.37 percent.

Competition Among Mass Media

Posted by D. Daniel Sokol

Maksymilian Kwiek (University of Southampton) addresses Competition Among Mass Media.

ABSTRACT: This paper investigates how mass media provide information to readers or viewers who have diverse interests. The problem of a mass medium comes from the fact that there is a constraint on how much information can be delivered. It is shown that the mass medium optimally provides information that is somewhat useful to all agents, but not perfect to anybody in particular. This benchmark model is then used to investigate competition among mass media with differentiated products. In the equilibrium of the example studied, mass media differentiate their news fully, as if they were monopolies on the subset of readers to which they tailor their news. However, prices are disciplined by competition.

The Supreme Court Invalidates State Restriction on Federal Class Actions in Shady Grove v. Allstate

Posted by D. Daniel Sokol

Aidan Synnott, Paul, Weiss & Daniel Crane, Univ. of Michigan explain how The Supreme Court Invalidates State Restriction on Federal Class Actions in Shady Grove v. Allstate.

ABSTRACT: The United States Supreme Court recently held that Federal Rule of Civil Procedure 23 trumps a state rule that forbids all class action relief based on a state statutory penalty. With the Court splitting along ideologically diverse lines, three separate opinions vigorously debated matters of state policy prerogative and legislative interpretation. The Justices appeared to agree, however, that the decision will surely result in increased forum shopping for class action plaintiffs under the Class Action Fairness Act, 28 U.S.C. § 1332(d) (2006) ("CAFA"). The irony, not lost on the dissent, was that CAFA was enacted to protect class action defendants from state judges overeager to certify large classes. It now acts to submit the same defendants to federal class action liability where state class action liability does not exist.

The ripples from Shady Grove likewise reach antitrust law. For instance, the same state rule at issue in Shady Grove also restricts class action relief under New York's antitrust provision, the Donnelly Act. Coupled with CAFA, Shady Grove may lead to more antitrust class actions in federal court based on state law provisions like the Donnelly Act.