Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, March 31, 2011

WHEN IS INTELLECTUAL PROPERTY NEEDED AS A CARROT FOR INNOVATORS?

Posted by D. Daniel Sokol

Christoph Engel (Max Planck) asks WHEN IS INTELLECTUAL PROPERTY NEEDED AS A CARROT FOR INNOVATORS?

ABSTRACT: Policymakers all over the world claim that there can be no innovation without protection. For more than a century, critics have objected that the case for intellectual property is far from clear. This article uses a game theoretic model to organize the debate. It is possible to model innovation as a prisoner's dilemma between potential innovators and to interpret intellectual property as a tool for making cooperation the equilibrium. However, this model rests on assumptions about costs and benefits that are unlikely to hold, or have even been shown to be wrong, in many empirically relevant situations. Moreover, even if solution. It sets incentives to race to be the first, or the last, to innovate, as the case may be. In equilibrium, the firms would need to randomize between investment and noninvestment, which is unlikely to work out in practice. Frequently, firms would need to invent cooperatively, which proves difficult in larger industries.

March 31, 2011 | Permalink | Comments (1) | TrackBack (0)

Trade Secrets and Antitrust Law

Posted by D. Daniel Sokol

Harry First, New York University (NYU) - School of Law has published Trade Secrets and Antitrust Law.

ABSTRACT:The antitrust treatment of trade secrets has remained largely hidden, with trade secrets today being viewed as simply the equivalent of other forms of intellectual property. Closer examination reveals, however, that although the antitrust treatment of trade secrets fits generally into the debate over the proper antitrust treatment of intellectual property rights, the arguments for according deference to the protection of confidential trade secret information are somewhat different from, and far weaker than, the arguments for according such deference to either patents or copyrights.

This article begins by exploring the two fundamental issues for antitrust analysis of trade secrets: What is a trade secret and what consequence should flow from a firm's decision to choose the trade secret regime when it wants to protect information. The second section maps the state of the law dealing with antitrust and trade secrets, discussing the early history (which predates the Sherman Act) and then describing how the courts have come to deal with licensing issues under Section 1 of the Sherman Act and with exclusionary conduct under Section 2. The final section sets out and applies a more general framework for antitrust analysis of trade secrets, proposing three guiding principles: 1) Trade secrets should receive no deference or presumptions when raised as a defense to anti-competitive conduct. 2) Antitrust courts, when assessing the economic consequences of trade secret protection, should be mindful of the legal properties of trade secrets. 3) Antitrust courts should respect - but not expand - the bargain that holders of trade secret protection are provided as an incentive to invest in the production of information.

March 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Why Copperweld Was Actually Kind of Dumb: Sound, Fury, and the Once and Still Missing Antitrust Theory of the Firm?

Posted by D. Daniel Sokol

Chris Sagers, Cleveland State University - Cleveland-Marshall College of Law has written Why Copperweld Was Actually Kind of Dumb: Sound, Fury, and the Once and Still Missing Antitrust Theory of the Firm?

ABSTRACT: Since even before Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), it has been thought that antitrust needs some "theory of the firm" to inform its application of a "single-entity" defense in Sherman Act section 1 litigation. Not only is that sense mistaken, it is emblematic of the deep misdirection of contemporary antitrust. It shows just how far antitrust has forgotten that it is a law, a practical tool to implement policy choices made through our system of government. Much too much of the time, it seems to fancy itself rather an abstract policy seminar to be dabbled in by the federal bench and its academic support staff. The point to be made specifically in this paper is one small part of that argument. Copperweld has generally been thought of as a watershed, a decision so obviously right and so reasonable in its analysis that it is not thought about very critically. But if it was so wise, one might have thought that single-entity decisions in the lower courts would become more principled and more coherently linked to clearly stated goals than they had been before. At the very least, they should seem different than the pre-Copperweld cases. And yet, they do not. Single-entity cases before and after Copperweld are largely indistinguishable, setting out the same ad hoc, subjective, and usually pretty shallow reasoning, with no obvious connection drawn to specified goals. The paper takes this fact as evidence that engaging in this sort of complex institutional analysis at such an early stage -- often enough at some point of early summary disposal, with little or no discovery -- is unwise.

 

March 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Platform Competition Under Asymmetric Information

Posted by D. Daniel Sokol

Hanna Halaburda, Harvard Business School and Yaron Yehezkel, Tel Aviv University - Eitan Berglas School of Economics address Platform Competition Under Asymmetric Information.

ABSTRACT: In the context of platform competition in a two-sided market, we study how uncertainty and asymmetric information concerning the success of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead in a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, the model provides a compelling argument why it is usually entrants, not incumbents, that bring major technological innovations to the market. Second, we consider multi-homing. We find that the incumbent dominates the market and earns higher profit under multi-homing than under single-homing. Multi-homing solves the market failure resulting from asymmetric information in that the incumbent can motivate the two sides to trade for the first-best quantity even if the difference in the degree of asymmetric information between the two sides is narrow.

March 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 30, 2011

Universidad Di Tella - Programa Avanzado en Defensa de la Competencia

Posted by D. Daniel Sokol

The School of Government of Di Tella University in Argentina will have an advanced competition course in July. I know that if I could go, there is no place I would rather be than in Buenos Aires in July - good course, good fine, good wine, good culture, good shopping. What is not to love? To sign up, download the attached pdf.Download Curso_defensa_de_la_competencia_2011

March 30, 2011 | Permalink | Comments (1) | TrackBack (0)

IBC Legal's 13th annual residential EU Competition Law Summer School

Posted by D. Daniel Sokol

The ultimate guide to European competition law: IBC Legal's 13th annual residential EU Competition Law Summer School, a unique training course and conference

Gain a complete A-Z of EU competition law at the industry leading EU Competition Law Summer School:

IBC Legal Conferences' interactive 5-day residential summer school will provide you with a sophisticated guide to EU competition law and the essential practical tools you need to master legal complexities and avoid pitfalls in your everyday work.

The event begins with an introduction to the topic, with each issue being studied in more depth as the week progresses. In order to provide you with the most gainful learning experience we have assembled leading officials from the Commission, private practitioners, experts and economists.

Delegates at this year’s EU Competition Law Summer School will analyse and discuss issues such as: 

  • A-Z of EU competition law 
  • Economic principles  
  • Article 101
  • Article 102
  • Decentralisation and criminalisation 
  • Update of latest reforms and developments
  • Recent case law
  • EU merger control   
  • Cartels
  • Horizontal and vertical agreements 
  • Block exemptions
  • Licensing and enforcement   
  • IP issues
  • International competition authority procedures  
  • State aid and Articles 107 - 109 TFEU
  • Private enforcement
  • Recent trends from the Commission and the Office of Fair Trading  
  • Compeititon litigation
  • In-house compliance management 

Programme for the EU Competition Law Summer School event

Meet your chairpersons for the week:

  • Day one: Euan Burrows, Ashurst
  • Day two: Martijn Jongmans, Banning 
  • Day three: Pat Treacy, Bristows
  • Day four: Peter Willis, Dundas & Wilson
  • Day five: Kevin Coates, DG Competition, European Commission 

Your esteemed speaker faculty includes: 

  • Katja Viertio, DG Competition, European Commission
  • Dennis Heidschmidt, Commerzbank
  • Alvaro Ramos, Cisco Systems
  • Nelson Jung, Office of Fair Trading (OFT)
  • Katrin Schallenberg, Clifford Chance
  • Matthew Readings, Shearman & Sterling
  • Euan Burrows, Ashurst
  • Dr Andreas von Bonin, Freshfields Bruckhaus Deringer
  • Peter Willis, Dundas & Wilson
  • Dr Ian Small, Charles River Associates
  • Martin Baker, Taylor Wessing
  • Pat Treacy, Bristows
  • Sean-Paul Brankin, Crowell & Moring
  • Dr Myles Jelf, Bristows
  • Robin Noble, Oxera
  • Daniel von Brevern, Linklaters 
  • Louisa Penny, Taylor Wessing 

Full list of speakers for the EU Competition Law Summer School 2011

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Rewarding innovation efficiently: Research spill-overs and exclusive IP rights

Posted by D. Daniel Sokol

Vincenzo Denicol (Indira Gandhi Institute of Development Research) and Luigi A. Franzoni (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth) address Rewarding innovation efficiently: Research spill-overs and exclusive IP rights.

ABSTRACT: We investigate the conditions for the desirability of exclusive intellectual property rights for innovators as opposed to weak rights allowing for some degree of imitation and ex-post competition. The comparison between the two alternatives reduces to a specific "ratio test," which suggests that strong exclusive IP rights are preferable when competition from potential imitators is weak, the innovation attracts large R&D investments, and research spill-overs are small.

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

JUST ONE OF US: CONSUMERS PLAYING OLIGOPOLY IN MIXED MARKETS

Posted by D. Daniel Sokol

Marco Marini, University of Urbino “Carlo Bo” and Alberto Zevi, University of Roma “La Sapienza” discuss JUST ONE OF US: CONSUMERS PLAYING OLIGOPOLY IN MIXED MARKETS.

ABSTRACT: Consumer cooperatives constitute a highly successful example of democratic forms of enterprises operating in developed countries. They are usually organized as medium and large-scale firms competing with profit-maximizing firms in retail industries. This paper models such situation as a mixed oligopoly in which consumer cooperatives maximize the utility of consumer-members and distribute them a share of the profit equal to the ratio of their individual expenditure to the firm total sales. We show that when consumers possess quasilinear preferences over a bundle of symmetrically di¤erentiated goods and firms operate with a linear technology, the presence of consumer cooperatives a¤ects all industries output and social welfare positively. The e¤ect of cooperatives on welfare proves more significant when goods are either complements or highly di¤erentiated and when competition is à la Cournot rather than à la Bertrand.

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

The Profitability of Small Horizontal Mergers with Nonlinear Demand Functions

Posted by D. Daniel Sokol

Hamideh Esfahani and Luca Lambertini (both Department of Economics, University of Bologna) explain The Profitability of Small Horizontal Mergers with Nonlinear Demand Functions.

ABSTRACT: We want to take a differential game approach with price dynamics to conduct an investigation into the consequences of horizontal merger of firms where the demand function is nonlinear. We take into consideration the open-loop equilibrium. We show that in relation to the fact that the demand is nonlinear and prices follow some stickiness an incentive for small merger exists, while it does not appear under the standard approach using a linear demand function.

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

What is Higher? HHI of Presumptively Anti-competitive Mergers or Caloric Intake at the ABA Antitrust Spring Meeting

Posted by D. Daniel Sokol

My goodness. One can get the daily caloric intake of an elephant in just one sitting for breakfast receptions that firms are putting on for the Spring Meeting and lunch and dinner are yet to come. I am 6'3 and weigh 156 lbs.  I have had constant weight since age 16. However, for the rest of you, let me offer some suggestions:

  1. don't eat fried foods
  2. drink lots of water
  3. don't eat cookies - the combination of sugar and fat may taste good but will give you a tummy ache at the 3pm session
  4. look for the grilled and raw vegetables. Raw are typically better for you but grilled taste better
  5. stay away from hard alcohol
  6. keep coffee down to two drinks a day

 

 

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Refusal to Supply and Margin Squeeze: A Discussion of Why the 'Telefonica Exceptions' are Wrong

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC), University of Michigan Law School explores Refusal to Supply and Margin Squeeze: A Discussion of Why the 'Telefonica Exceptions' are Wrong.

ABSTRACT: In its Guidance Paper on Article 102 TFEU, the Commission established three conditions that in its view must normally be satisfied before a "refusal to deal" or "margin squeeze" may be considered contrary to Article 102 TFEU, mirroring those established by the European Court of Justice (the "ECJ") in the Bronner case. However, in its Telefónica decision, the Commission took the view that in the circumstances of that case it did not have to prove that these conditions were satisfied before concluding that there was an abusive margin squeeze, as the particular circumstances of the Telefónica case were fundamentally different from those in Bronner. Against this background, this short paper seeks to demonstrate that the "Telefónica exceptions" do not make sense and are not justified from an EU law standpoint. On the contrary, their application could lead to negative consequences in particular by forcing a vertically-integrated dominant firm to give access to its infrastructure even when this access is not “essential” within the meaning of the refusal to deal case law of the ECJ.

March 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 29, 2011

Judicial Review in European Union Competition Law: A Quantitative and Qualitative Assessment

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC), University of Michigan Law School and Nicolas Petit, University of Liege have posted Judicial Review in European Union Competition Law: A Quantitative and Qualitative Assessment.

ABSTRACT: Ever since the creation of the General Court (“GC”), the effectiveness of judicial review in European Union (“EU”) competition cases has sparked intense scholarly debates.

This paper seeks to further contribute to this discussion in three ways. First, it devotes some space to fundamental, yet often overlooked questions, such as the goals or functions of judicial review and why judicial review of administrative decisions is important; particularly so in competition law matters. Second, this paper attempts to throw some empirical light on the GC’s judicial review of European Commission ("Commission") decisions in the field of competition law. Third, it places a specific emphasis on the particular situation of abuse of dominance law, where the GC has exercised its judicial review power with more restraint than in other areas of competition law (such as restrictive agreements and mergers).

With these goals in mind, this paper follows a five-stage progression. First, on the basis of a survey of the relevant legal, economic and political science literature, it defines the functions of judicial review and identifies a set of indicators which can be used to assess the performance of the GC’s judicial scrutiny (Part I). Second, it explains why judicial review in EU competition law cases is of critical importance notably given the institutional and procedural deficiencies of the EU enforcement structure (Part II). Third, it discusses the nature and standard of review currently applied by the GC with a particular focus on the degree to which the GC is willing to review “complex economic matters” (Part III). Fourth, it provides some quantitative data on the case-law of the GC to assess whether several goals or functions attributed to judicial review by the scientific literature are met (Part IV).

Finally, this paper takes a closer look at the (controversial) case-law of the GC in the field of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) (Part V). It observes that while the GC has taken initiatives to modernize normative legal standards in the fields of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and merger control, it has taken a conservative approach with respect to Article 102 TFEU where it has essentially relied on the formalistic case-law of the ECJ on exclusionary behaviour. In our view, this explains in large part why over the past decade, undertakings challenging Commission decisions have never been successful. The issue is not so much that the GC has turned a blind eye on the Commission’s abuse of dominance position decisions (although it may also be part of the problem), but that the normative legal standards that are used to determine whether dominant firm conduct infringes Article 102 TFEU are so unfavorable to dominant firms and give so much discretion to the Commission that it is almost impossible for such firms to have infringement decisions overturned. Unless these standards evolve, there is a considerable risk that benign dominant firm conduct will be prohibited. These standards will also act as an impediment to economics- or effects-based oriented reforms, such as those initiated by the Commission in its Guidance Paper on Article 102 TFEU.

March 29, 2011 | Permalink | Comments (0) | TrackBack (0)

Patent Value Apportionment Rules for Complex, Multi-Patent Products

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC), University of Michigan Law School and Anne Layne-Farrar, Law and Economics Consulting Group (LECG) address Patent Value Apportionment Rules for Complex, Multi-Patent Products.

ABSTRACT: The vast majority of the products developed by the IT industry are technologically complex, incorporating hundreds or thousands of different components, and many of these components read on an increasingly large number of patents held by a number of third parties. Assessing patent value when multiple, complementary patents held by different patent holders are involved is a complicated exercise, which may need to be carried out in both litigation and non-litigation contexts. US federal patent law authorizes a patentee who successfully proves that its patent has been infringed to recover profits lost or damages that are due to the infringer’s unlawful conduct, “but in no event less than a reasonable royalty” for the use of the patented invention. A royalty payment is comprised of two components: a royalty rate and a base upon which the rate is applied, typically referred to as the royalty base. Defining a reasonable royalty rate is in many ways an art as opposed to a science, and as such rates are perennially the subject of heated debate. But the royalty base is not free from controversy. Given the growing complexity of products, whether the royalty base for a given patent should include only the component(s) of the product that the patent directly reads on or the product as a whole seems an important question, which has been hotly debated in courts, but also by scholars and policy-makers. Against this background, the objective of this paper is not to review the case law of US federal courts dealing with apportionment, a task for which we are not qualified, but rather to offer some thoughts on the economic principles or rules that can be applied to address the determination of the royalty base and rate in concrete situations.

March 29, 2011 | Permalink | Comments (1) | TrackBack (0)

Standardization and Markets: Just Exactly Who is the Government, and Why Should Antitrust Care?

Posted by D. Daniel Sokol

Chris Sagers, Cleveland State University - Cleveland-Marshall College of Law has posted Standardization and Markets: Just Exactly Who is the Government, and Why Should Antitrust Care?

ABSTRACT: We take for granted that the basic choice in public policy is between allocation of resources by government bureaucracy, on the one hand, or allocation by markets, on the other. But that dichotomy is false, and at least under contemporary circumstances it is more accurate to describe the choice as between allocation by one kind of bureaucracy and allocation by a different kind of bureaucracy. This poses a problem for our antitrust policy, because it lacks any coherent guidance as to how to address those entities and transactions that are not governmental but are also not simply market-governed. This paper extensively examines one particular sector that nicely demonstrates how false the simple bureaucracy-markets dichotomy really is: the standard setting sector. Standardization is ubiquitous and hugely influential, but it is difficult to capture as either a government phenomenon or a market phenomenon.

March 29, 2011 | Permalink | Comments (0) | TrackBack (0)

20th annual Advanced EU Competition Law, London

Posted by D. Daniel Sokol

20th annual Advanced EU Competition Law, London conference

Prof Richard Whish, Dr Cristina Caffarra and Sir
Christopher Bellamy QC
are chairing and will be joined by 23
competition and policy experts
to ensure that in just two days you will review the implications of all major developments from the past year. Topics include:

  • Review of major events 2010 - 2011
  • The Commission's policies and priorities -
    learn directly from three senior DG Competition representatives
  • Cartel leniency & enforcement
  • Cartel settlements
  • Competition litigation
  • The Commission's guidelines on the new
    horizontal agreements
  • Mergers and joint ventures
  • EU merger control
  • U.S. horizontal merger guidelines
  • Article 101 and Article 102 developments

  • State aid in the financial services
    sector
  • Recent case law from legal and economic
    perspective - including AstraZeneca, Deutsche Telekom, Ryanair/Aer Lingus,
    AkzoNobel
  • IP and competition law issues

 

Plus a post-conference drinks reception. See the full agenda.

March 29, 2011 | Permalink | Comments (0) | TrackBack (0)

Pivotal Suppliers and Market Power in Experimental Supply Function Competition

Posted by D. Daniel Sokol

Jordi Brandts, Instituto de Analisis Economico (CSIC) Barcelona, Stanley S. Reynolds, University of Arizona - Department of Economics, and Arthur J. H. C. Schram, University of Amsterdam - Faculty of Economics and Business (FEB), Tinbergen Institute explore Pivotal Suppliers and Market Power in Experimental Supply Function Competition.

ABSTRACT: In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.

March 29, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, March 28, 2011

Spring Meeting - Here I Come

Posted by D. Daniel Sokol

If you live under a rock, then you are not aware of the best practitioner conference in the US in any given year - the ABA Antitrust Spring Meeting. For the rest of you, this is an important week. I will be at the 59th Annual Spring Meeting this year. As is typically the case, I am very impressed with the quality of the programming. In my official capacity as a Vice Chair of the Membership Committee, let me suggest that if you are not involved in the Antitrust Section (even if you are not a US lawyer), you are missing out. The programming is excellent as are the written materials that people spend lots of time putting together in various newsletters, magazines, journals and books of the Section. There is still time to register for the Spring Meeting and still time to join the Section.

March 28, 2011 | Permalink | Comments (0) | TrackBack (0)

Lessons from the Financial Crisis

Posted by D. Daniel Sokol

Maurice Stucke (Tennessee Law) provides Lessons from the Financial Crisis.

ABSTRACT: What lessons can we learn from the financial crisis concerning the issues of systemic risk, firms too big to fail, and the income inequality in the United States today? In light of the public anger over the financial crisis and bailouts to firms deemed too big to fail, this Essay first addresses the issue of systemic risk posed by mergers generally and those in the financial services industries specifically. The federal government heard concerns in the 1990s about mega-mergers in the financial industry. The Department of Justice, for example, heard concerns that the Citibank-Travelers merger would create an institution too big to fail. But the government essentially discounted these concerns. This Essay argues that competition authorities must look beyond the mergers’ short-term impact on static price competition to better understand mergers’ potential long-run effects on the financial network’s health and stability. As income inequality has increased over the past thirty years in the United States, this Essay discusses the political implications of concentrated economic power. The causes of income inequality, whether lax antitrust enforcement is a contributing factor, and whether income inequality can affect antitrust policy are all discussed.

March 28, 2011 | Permalink | Comments (0) | TrackBack (0)

Driving Innovation: A Case for Targeted Competition Policy in Dynamic Markets

Posted by D. Daniel Sokol

Jonathan Galloway, Newcastle Law School explains Driving Innovation: A Case for Targeted Competition Policy in Dynamic Markets.

ABSTRACT: Innovation consists of new ideas, methods and products and together they drive economic growth and deliver benefits to society as a whole. Competitive intensity and rewards both drive innovation, but the importance of providing high rewards, which are secured by intellectual property rights (IPRs), is regularly overstated. Indeed, greater competition and the role of competition law is often claimed to have a ‘chilling effect’ on innovation in spite of facilitating greater dynamic efficiency. This article argues that competition and rewards, and indeed competition law and IPRs, are not mutually exclusive and suggests an approach to maximise innovation in dynamic markets whereby competition law applies to conduct beyond the natural scope of IPR protection. This article tests the suggested approach by applying it to a number of controversial practices in the pharmaceutical sector, as well as standard setting in high technology markets, which give rise to competition concerns. This article concludes by advocating proactive, justifiable competition intervention when conduct exceeds the natural scope of IPRs, and thereby presents a case for targeted competition policy in dynamic markets.

March 28, 2011 | Permalink | Comments (0) | TrackBack (0)

The Transformation of American Energy Markets and the Problem of Market Power

Posted by D. Daniel Sokol

David B. Spence, University of Texas at Austin - Department of Business, Government and Society and Robert A. Prentice, University of Texas at Austin - McCombs School of Business describe The Transformation of American Energy Markets and the Problem of Market Power.

ABSTRACT: Traditionally, American energy markets have been regulated using a combination of antitrust law and public utility law: the former has predominated in oil markets and the latter in markets for natural gas and electricity. Over time, energy markets have grown increasingly complex and competitive, due partly to changing market conditions (for example, in oil markets) and partly to the regulation (in natural gas and electricity markets). Increasingly competitive energy markets meant increased risk for energy companies, who turned to energy derivatives as a way to hedge that risk. High energy prices and charges of manipulation in 21st-century energy markets have led regulators to a new approach, one that borrows from securities regulation and focuses attention and "manipulation and deceit" by energy market participants. However, the securities model may be a bad fit for energy markets, because reliance on this new approach exposes consumers to price risks associated with the exercise of market power by sellers, risks to which they were not subject under traditional approaches to regulation. Specifically, the securities regulation model overlooks important ways in which sellers can exert market power at the expense of consumers in the absence of fraud or deceit, partly because of the way securities case law interprets "manipulation," and partly because some of the common assumptions regulators employ about the ways in which market participants respond to price changes do not apply, or apply only weakly, in some energy markets. We explore the origins of these "bad fit" problems, and their implications, in this article.

 

March 28, 2011 | Permalink | Comments (0) | TrackBack (0)