Antitrust & Competition Policy Blog

Interchange Regulation: Implications for Credit Unions

Posted by D. Daniel Sokol

Adam Levitin (Georgetown Law) has written on Interchange Regulation: Implications for Credit Unions.

ABSTRACT: This research brief reviews the potential implications of the Durbin Interchange Amendment on credit unions based on an original survey of credit unions debit and credit card programs.

 

Counting Rivals or Measuring Share: Modeling Unilateral Effects for Merger Analysis

Posted by D. Daniel Sokol

Malcolm Coate is a one man transparency regime for the FTC (hint, hint, can someone step up to the plate at DOJ and start doing some similar analysis?).  In Counting Rivals or Measuring Share: Modeling Unilateral Effects for Merger Analysis he examines unilateral effects as it has been undertaken at the FTC.  I highly recommend this working paper.

ABSTRACT: This paper explores the FTC’s unilateral effects merger policy using a sample of 184 investigations undertaken between 1993 and 2009. A review of the files suggests that roughly half of the sample is evaluated with a dominant firm/monopoly model, while the rest of the cases require a more complex unilateral effects analysis. Deterministic modeling based on the number of significant rivals suggests that the four-to-three transaction in a market with impediments to entry represents the marginal merger challenge. Case specific facts explain deviations from this rule and suggest that critical diversion ratios fall into the 25-30 percent range. Share based indices (post-merger market share, change in the Herfindahl, or a share-based Gross Upward Pressure on Price variable) can be used, but require the definition of a market and do not predict outcomes as well as the significant rivals’ model. An Appendix details the various reasons why the staff declined to apply a unilateral effects analysis to conclude a merger was likely to substantially lessen competition in a broader sample of differentiated products mergers.

Short-Term Managerial Contracts Facilitate Cartels

Posted by D. Daniel Sokol

Martijn A. Han, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE) suggests that Short-Term Managerial Contracts Facilitate Cartels.

ABSTRACT: This paper shows how a series of commonly observed short-term CEO employment contracts improves cartel stability compared to a long-term contract. When a manager’s short-term appointment is renewed if and only if the firm hits a certain profit target, then (a) defection from collusion results in superior firm performance and thus reduces the chance of being fired immediately, while (b) future punishment results in inferior firm performance, thereby increasing the chance of being fired in the future. The introduction of this reemployment tradeoff intertwines with the usual monetary tradeoff and weakly improves cartel stability. Studying the impact of fixed versus variable salary components, I find that fixed components facilitate collusion with a short-term contract, while not affecting cartel stability with a long-term contract. I extend the model to argue how short-term renewable contracts are a source of cyclical collusive pricing. Finally, interpreting the results in the light of firm financing shows how debt-financed firms can form more stable cartels than equity-financed firms.

Monopoly Innovation and Welfare Effects

Posted by D. Daniel Sokol

Shuntian Yao, Nanyang Technological University (NTU) - Centre for Research in Financial Services (CREFS) and Lydia L. Gan, Department of Economics and Finance, School of Business, Medical Tourism Research Center address Monopoly Innovation and Welfare Effects.

ABSTRACT: In this paper we study the welfare effect of a monopoly innovation. Unlike many partial equilibrium models carried out in previous studies, general equilibrium models with non-price-taking behavior are constructed and analyzed in greater detail. We discover that technical innovation carried out by a monopolist could significantly increase the social welfare. We conclude that, in general, the criticism against monopoly innovation based on its increased deadweight loss is less accurate than previously postulated by many studies.

Keywords: Google, European Commission. Anyone Feeling Lucky?

Posted by D. Daniel Sokol

Lia Vitzilaiou (Lambadarios Law Offices) has authored Keywords: Google, European Commission. Anyone Feeling Lucky?

ABSTRACT: On November 30, 2010, the European Commission issued a press release which many were worried about, others looking forward to, but almost everyone anticipated: Google is under formal antitrust investigation with regard to an alleged abuse of dominance in the online search market.

The Commission will investigate three main issues. The first is whether Google has manipulated its unpaid or "algorithmic" search results by giving preferential placement to its own results while lowering the ranking of those offered by competitors, i.e. vertical search engines. The second issue is whether Google has imposed exclusivity contracts on its advertising partners, preventing them from placing ads on competitive websites. Finally, the Commission will look into whether Google has restricted the portability of online advertising campaign data to competing online advertising platforms.

This development was expected by most, not only because Google has recently been the center of attention for many national competition authorities (the latest being the Italian antitrust investigation in the Google News Service which ended by compromise) but also because the Commission seems to have lately targeted powerful technology companies. Since 2004, when Microsoft was fined EUR 497 million for abuse of dominance, to 2008 when a further EUR 899 million penalty was imposed for failure to comply with the 2004 ruling, up to 2009 when Intel was fined a historic EUR 1.1 billion, also for abuse of dominance, the Commission has shown a strong interest in the high-tech industry, apparently feeling confident it has the sophistication to tackle the complex issues arising in such innovative markets.

This Commission investigation targets the core of the Google business, i.e. its search engine, and naturally has attracted a lot of controversy. For example, there is speculation that this is an attack partly assisted by Microsoft, which recently merged its search business with Yahoo's in order to challenge Google's market lead.This assertion is based on the fact that Microsoft owns one of the plaintiffs (Ciao!) as well as a price comparison service in Germany, and it sponsors a trade grouping called ICOM, a member of which is another plaintiff called Fodem, a British price comparison service.If this is the case, then there might be more competition in the search engine market than initially appears.

Also controversially, Benjamin Edelman, an assistant professor at Harvard Business School, recently published the results of a study conducted of Google's search engine, which allegedly show that there exists what he calls a "hard coded bias" that overrides the normal algorithmic results in order to put a Google answer first. In another study, he suggests that this "distortion" is identified with almost all leading search engines, including Yahoo!, but supposedly Google promotes its own services significantly more than others.

Google can be expected to bring forth evidence to contest such arguments. As we are not yet in a position to reach solid conclusions on such complex technical issues to answer the core question of whether Google tampers with its search results or not, it is safer to look at the available facts and pose some other questions also relevant to the competition analysis.

The first question is whether Google has a motive to tamper with its search results, in view of the two-sided platform market it operates. The second question is whether it is Google or the Commission who should "be feeling lucky" in the present dispute. And finally, if the "holy grail" of a neutral search engine is behind the Commission investigation, is this a realistic pursuit?

Input Price Discrimination When Buyers Operate in Multiple Markets

Posted by D. Daniel Sokol

Anil Arya, Ohio State University (OSU) - Fisher College of Business and Brian Mittendorf, Ohio State University (OSU) - Fisher College of Business analyze Input Price Discrimination When Buyers Operate in Multiple Markets.

ABSTRACT: This paper revisits third degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.

Sokol - Do I really Look Like "The Greatest Insurance Agent of All Time" in the Nationwide Ads?

Posted by D. Daniel Sokol

I read through my student evaluations this morning from last semester (good news: high marks).  A number of the evaluations noted that I had a more than passing resemblance to the guy in the Nationwide Insurance ads and that we have similar mannerisms.  What do you readers think?

 

 

The Re-Emergence of Prices Surveillance

Posted by D. Daniel Sokol

David Charles Cousins, Monash University - Faculty of Law and Allan Fels, Australia and New Zealand School of Government address The Re-Emergence of Prices Surveillance.

ABSTRACT: In an election year with inflation starting to creep up and beyond the Reserve Bank of Australia’s target zone, it is not surprising that the focus of the major parties turned to prices. In particular, petrol prices were of significant consumer concern, having risen by some 15 cents per liter over the January – June 2007 period from an already historical high. In June, the Australian Competition and Consumer Commission (‘ACCC’) raised concerns that local prices had remained high despite a significant fall in international prices. Shortly after this, the Federal Opposition announced that if elected, it would ‘appoint a national Petrol Commissioner with the sole responsibility to formally monitor and investigate price gouging and collusion’. The ACCC then recommended to the Treasurer that a general inquiry into petrol prices be conducted by the ACCC, and this was agreed to by the Treasurer the following day. The inquiry was to be completed by the end of October, before the election date later in November, but was subsequently given an extension of time. Also in July, the Opposition Leader made what was billed as a major statement on the cost of living in Australia. He promised, if in government, to strengthen the powers of the ACCC to monitor supermarket prices and to direct the ACCC to hold a National Grocery Pricing Inquiry. The ACCC would also be directed to publish a periodic survey of grocery prices at supermarkets for a typical shopping basket to be published on a dedicated website. The petrol and groceries inquiries subsequently undertaken by the ACCC were both substantial exercises requiring extensive involvement by the Chairman and a number of the Commissioners. They were the first significant prices surveillance inquiry references given by the Federal Government to the ACCC since its establishment through the merger of the Trade Practices Commission and the Prices Surveillance Authority. The provisions of the old Prices Surveillance Act 1983 (Cth) were generally incorporated into Part VIIA of the Trade Practices Act 1974 (Cth) in 2004. This paper summarises the key aspects of these two inquiries and comments on the policy recommendations made by them. Whilst generally supporting the views the ACCC has put, there are some areas where we have a different emphasis. Some further general observations on the use of the prices surveillance powers conclude the paper.

Preventing Merger Unilateral Effects: A Nash-Cournot Approach to Asset Divestitures

Posted by D. Daniel Sokol

Patrice Bougette, Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG), Université de Montpellier 1 explores Preventing Merger Unilateral Effects: A Nash-Cournot Approach to Asset Divestitures.

ABSTRACT: This paper aims to analyze the effectiveness of asset transfers in preventing unilateral effects of a merger. We show that asset divestitures allow the remedying of certain price increases. Market size negatively impacts the scope of the divestiture package, while the number of merging firms increases with it. In spite of the required asset sale, parties’ profitability remains ensured in most cases. Buyers always make profit from their purchase if industry fixed costs are rather low. We also add the alternative of a second buyer and compare outcomes with both consumer and welfare standards. Furthermore, as many mergers lead to efficiency gains, we integrate specific cost synergies and show that the higher the synergies, the smaller the divestiture share. In the case when no buyers are available, we show that the option of divesting to a start-up entity is bound to fail if firms’ technology remains the same. Lastly, we find that product differentiation can reduce the efficiency of the asset transfer.

Price-Concentration Analysis in Merger Cases with Differentiated Products

Posted by D. Daniel Sokol

Walter Beckert, University of London, Birkbeck College - School of Economics, Mathematics and Statistics and Nicola Mazzarotto, discusses Price-Concentration Analysis in Merger Cases with Differentiated Products.

ABSTRACT: This paper aims to analyze the effectiveness of asset transfers in preventing unilateral effects of a merger. We show that asset divestitures allow the remedying of certain price increases. Market size negatively impacts the scope of the divestiture package, while the number of merging firms increases with it. In spite of the required asset sale, parties’ profitability remains ensured in most cases. Buyers always make profit from their purchase if industry fixed costs are rather low. We also add the alternative of a second buyer and compare outcomes with both consumer and welfare standards. Furthermore, as many mergers lead to efficiency gains, we integrate specific cost synergies and show that the higher the synergies, the smaller the divestiture share. In the case when no buyers are available, we show that the option of divesting to a start-up entity is bound to fail if firms’ technology remains the same. Lastly, we find that product differentiation can reduce the efficiency of the asset transfer.

On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model

Posted by D. Daniel Sokol

Pu Chen, University of Bielefeld - Department of Business Administration and Economics has thoughts On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model.

ABSTRACT: We analyse the effects of predation in a vertical differentiation model, where the highquality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival's exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.

Intellectual Liability in Context

Posted by D. Daniel Sokol

John M. Golden, University of Texas School of Law has responded to Intellectual Liability in Context.

ABSTRACT: In Intellectual Liability, Daniel Crane reemphasizes that a “right to exclude” is only one part of a Hohfeldian package of rights, privileges, powers, or immunities that government can grant an intellectual property (IP) owner. Crane points out that an overly vigorous right to exclude, one backed up by a strong presumption of injunctive relief against continued infringement, could result in a suboptimal IP package even from the IP owner’s perspective. Drawing on examples of antitrust-influenced behavior of collective-rights organizations and standard-setting organizations, Crane argues that forgoing property-rule treatment in the Calabresi–Melamed sense can be more than compensated, socially and possibly even privately, by IP owners’ gains of privileges and powers to participate in one or more practices of “bundling,” as through a collective-rights organization or standard-setting organization, or through acquisition of large numbers of patents in the manner of a so-called “patent troll.” Crane’s bottom line thus expands on the prescription underlying Louis Kaplow’s “ratio test” of more than a quarter century ago: the optimal package to be granted IP owners should be developed by providing “those rights that grant just enough reward to induce... inventive or creative activity at the lowest social cost possible.”

Strategic Delegation Improves Cartel Stability

Posted by D. Daniel Sokol

Martijn A. Han, University of Amsterdam - Amsterdam Center for Law & Economics has written on Strategic Delegation Improves Cartel Stability.

ABSTRACT: Fershtman and Judd (1987) and Sklivas (1987) show how strategic delegation in the one-shot Cournot game reduces firm profits. However, with infinitely repeated interaction, strategic delegation allows for an improvement in cartel stability compared to the infinitely repeated standard Cournot game, thereby actually increasing profits.

Tying, Bundling, and Loyalty/Requirement Rebates

Posted by D. Daniel Sokol

Nic Economides (NYU - Stern School of Business) has a chapter on Tying, Bundling, and Loyalty/Requirement Rebates.

ABSTRACT: I discuss the impact of tying, bundling, and loyalty/requirement rebates on consumer surplus in the affected markets. I show that the Chicago School Theory of a single monopoly surplus that justifies tying, bundling, and loyalty/requirement rebates on the basis of efficiency typically fails. Thus, tying, bundling, and loyalty/requirement rebates can be used to extract consumer surplus and enhance profit of firms with market power. I discuss the various setups when this occurs.

Vertical integration in the Czech agriculture – focus on dairy and meat sectors

Posted by D. Daniel Sokol

Karel Jonda (Charles University) explores Vertical integration in the Czech agriculture – focus on dairy and meat sectors.

ABSTRACT: In this paper we provide an overview of the two most important sectors in the Czech agriculture: the dairy farming and the meat production. Since the focus of our paper in on the vertical integration, we provide this overview along the whole production vertical line. We start with the suppliers for the farmers and continue through the farm production, distribution and milk and meat processing and storage facilities. The final links in the production vertical structure are wholesale and retail consumers. In both of the considered vertical lines we concentrate on the key analytical parameters which are price transmission elasticities and we provide an overview of their values obtained in the Czech agricultural economic research. Since the question of competition and strategic relations inside the vertical supply-demand structure is an important topic in industrial organization theory and policy, we also pay attention to ma! jor cases of alleged fair competition violations in the Czech meat and diary industry.

Automobile engine variants and price discrimination

Posted by D. Daniel Sokol

Øyvind Thomassen (Katholieke Universiteit Leuven) investigates Automobile engine variants and price discrimination.

ABSTRACT: Using a structural model of demand for automobile engine variants, this paper finds that there is second-degree price discrimination: markups increase with engine size. Still, average markups are lower than when models have just one engine. The paper develops the first empirical demand framework suitable for markets with variants. There is an unobserved product characteristic and a consumer-specific logit term for classes of products, but both are fixed across variants. Fixed effects control for unobservables. The literature’s assumption of orthogonality between unobserved and observed product characteristics is not needed.

Cartel Risks & Compliance

Posted by D. Daniel Sokol

Attend IBC Legal's 4th annual Cartel Risks & Compliance conference (29th March 2011 in Brussels) to minimise your exposure to cartel risks and to learn how to deal with the consequences of any such activities.

All of today's most challenging topics will be analysed, for example your overall strategy when dealing with multi-jurisdictional investigations and the implementation of the European Commission's settlement package as in the DRAM case. - more topics on the programme.

Your speaker line-up includes:

• Johan Ysewyn, Partner, Linklaters LLP, Belgium
• Edward Anderson, Head of Competition Law, Sainsbury's Supermarkets Ltd, UK
• Laurent Geelhand, General Counsel Europe, Michelin Group, France
• Anny Tubbs, European Competition Counsel, Unilever European Legal Services, Belgium
• Kris de Keyser, Head of Unit, Cartel Settlements, DG Competition, European Commission, Belgium (subject to final confirmation)
• Nicola Northway, Managing Director, Group Competition Law, Barclays Bank plc, UK
• Peter Camesasca, Partner, Covington & Burling, Belgium
• Miguel Odriozola, Partner, Clifford Chance LLP, Spain
• Laurent Garzaniti, Partner, Freshfields Bruckhaus Deringer LLP, Belgium
• Dr Till Schreiber, Legal Counsel, Cartel Damage Claims, Belgium

Plus another 6 experts - see the full list.

Accreditation: 6.5 SRA hours, Bar Council hours will also be available.

"Extremely interesting conference. The choice of speakers made this event truly enjoyable and worth every minute to be there!" (M Peristeraki, Mayer Brown International LLP)

To benefit from the £200 early bird saving remember to book by the end of this Friday:

              > Visit the website
              > Email [email protected]  
              > Call +44 (0) 20 7017 5503

You will need to quote VIP Code: FNDQXGS in all correspondence.

Two-Sided B2B Platforms

Posted by D. Daniel Sokol

Bruno Jullien (Toulouse - Econ) summarizes Two-Sided B2B Platforms.

ABSTRACT: This chapter provides a roadmap to the burgeoning literature on two-sided markets with a specific focus on BtoB market places. On-line intermediation involves two-sided network effects between buyers and sellers, and the implications for optimal BtoB platforms’ tariffs are discussed. The chapter discusses first the monopoly case, drawing attention to the distinction between upfront registration and transaction fees. Then the competitive case is discussed, with different degrees of differentiation, the distinction between single-homing and multi-homing, and different business models. The last section is devoted to non-price issues such as tying, the design of the matching process and the ownership structure.

More Ian Norris - 3rd Circuit Appeals brief on whether outside counsel can serve as a "conduit" to the grand jury of a false statement

Posted by D. Daniel Sokol

There is an interesting crim law - antitrust intersection development in the Ian Norris case.  See the recent story in Corporate Counsel Magazine.  The policy question is whether an outside counsel can serve as a "conduit" to the grand jury of a false statement. That is, is any omission of a fact to your defense attorney equivalent to false testimony before the grand jury?

I attach Appealant's brief (authored by the White & Case team of J Mark Gidley and Christopher M Curran). Download 2011-01-21_Appellant's_Brief[1]

Product differentiation on a platform: the informative and persuasive role of advertising

Posted by D. Daniel Sokol

Dries De Smety and Patrick Van Cayseele (both Katholic University of Leuven - Econ) explain Product differentiation on a platform: the informative and persuasive role of advertising.

ABSTRACT: Both sides of a two-sided market are usually modeled as markets without product differentiation. Often however,it will be profit maximizing to differentiate one or two sides in two or more types. In a simple theoretical model,inspired by Yellow Pages,we show that this decision crucially depends on the appreciation of these differentiated types by the other side. We argue that this consists of two parts: first, a preference for informative advertisement by users and second, the effect of persuasive advertisements on users. The relation between both effects drives the monopolist decision to engage in product differentiation. We test this conceptual framework in an empirical investigation of Yellow Pages. We find that Yellow Pages publishers offer large ads even though users don't value them at all. The economic rationale for this is that each advertisement type contributes directly (by the price paid for it) and indirectly! (by increased usage) to revenues. Large ads are mainly set for this direct contribution, small ads for this indirect contribution. If a platform can choose the size, it will make the size difference between small and large ads as large as possible, in order to attract as much users as possible, but also to induce self selection among advertisers.