Antitrust & Competition Policy Blog

Demand Spillovers and Market Outcomes in the Mutual Fund Industry

Posted by D. Daniel Sokol

Alessandro Gavazza (NYU Stern School) analyzes Demand Spillovers and Market Outcomes in the Mutual Fund Industry.

ABSTRACT: When consumers concentrate their purchases at a single firm, a firm that offers more products than its rivals can gain market share for all its other products, as well. These spillovers induce firms to compete by offering a greater variety of products rather than lower prices, and a natural form of industry concentration with few large firms offering many products can arise if spillovers are strong enough. This paper presents a simple model that illustrates this mechanism explicitly. The empirical analysis documents strong demand spillovers in the retail segment of the U.S. mutual fund industry, in which fees are non-trivial, families offer a large number of funds, and the market is quite concentrated. Instead, spillovers are weaker, fees are lower, families offer fewer funds, and the market structure is more fragmented in the institutional segment. The current design of employer-sponsored defined-contribution retireme! nt plans likely accounts for these differential demand patterns between the retail and the institutional segments.

Dynamic Competition in Electricity Markets: Hydroelectric and Thermal Generation

Posted by D. Daniel Sokol

Talat S. Genc (Department of Economics,University of Guelph) and Henry Thille (Department of Economics, University of Guelph) analyze Dynamic Competition in Electricity Markets: Hydroelectric and Thermal Generation.

ABSTRACT: We study competition between hydro and thermal electricity generators that face uncertainty over demand and water flows where the hydro generator is constrained by water flows and the thermal generator by capacity. We compute the Feedback equilibrium for the in?nite horizon game and show that there can be strategic withholding of water by the hydro generator. When water inflow is relatively low, however, the hydro generator may use more water than efficient as it faces an inefficiently low shadow price of water in this case. The inefficiency of the market outcome is tempered by the capacity constraints: for a large range of possible thermal production capacities and water flow levels, welfare loss under the duopoly market structure is much less than would occur in the absence of water and capacity constraints.

On the effect of prospective payment system on hospital efficiency and competition for patients in Germany

Posted by D. Daniel Sokol

Helmut Herwartz and Christoph Strumann (both Christian-Albrechts-Universitat zu Kiel) write On the effect of prospective payment system on hospital efficiency and competition for patients in Germany.

ABSTRACT: The introduction of hospital reimbursement based on diagnosis related groups (DRG) in 2004 has been a conspicuous attempt to increase hospital efficiency in the German health sector. In this paper changes of hospital efficiency, quantified as a Malmquist index decomposition in pure technical efficiency change, are analyzed for periods before and after the reform. We implement a two-stage semi-parametric efficiency model that allows for spatial interdependence among hospitals. The results reveal an enhancement in overall efficiency after the DRG introduction. Moreover, an increase in the magnitude of negative spatial spillovers among German hospital performance can be diagnosed. This result is in line with a rise of competition for (low cost) patients.

Consumer behavior towards on-net/off-net price differentiation

Posted by D. Daniel Sokol

Justus Haucap, and Ulrich Heimeshoff (Heinrich-Heine-University of Duesseldorf, Duesseldorf Institute for Competition Economics) explore Consumer behavior towards on-net/off-net price differentiation.

ABSTRACT: This paper explores how consumers react towards price differentiation between on-net and off-net calls in mobile telecommunications - a pricing policy that is common in many mobile telecommunications markets. Based on a survey of 1044 students we demonstrate that some consumers may suffer from a 'price differentiation bias', i.e., a fair number of consumers may overestimate the savings that result from reduced on-net and/or off-net charges, as they do not appear to weigh the prices with the probabilities of placing off-net and on-net calls. This may help to explain why it have been the smaller operators in various countries who have introduced on-net/off-net price differentiation. We also discuss the implications that such a consumer bias may have for market competition.

Martijn A. Han awarded the 2011 Robert F. Lanzillotti Prize

Posted by D. Daniel Sokol

Congrats to Martijn Han, who was awarded the 2011 Robert F. Lanzillotti Prize at the annual International Industrial Organization Conference (IIOC) organized in Boston on 8-10 April. I saw Bob Lanzillotti in April. He is doing great and is still doing antitrust consulting well past the time that many people of similar age are retired. Congrats to Martijn. His paper is really good. Lamentably, I did not get a chance to tell this to Martijn live when I was at U. Amsterdam last Friday giving a talk.

Managerial ownership, entrenchment and innovation

Posted by D. Daniel Sokol

Mila Beyer, Dirk Czarnitzki, and Kornelius Kraft (ZEW) have an interesting paper on Managerial ownership, entrenchment and innovation.

ABSTRACT: Principle-agent theory suggests managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers might over-invest into innovation for reasons of growth implying higher remuneration, power and prestige. Using a sample of 1,406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared to owners giving rise to the risk argument. Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. Thus, managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career, and hence tend to over-invest into innovation.

Defensive strategies in the quality ladders

Posted by D. Daniel Sokol

Ivan Ledezma (CES - Centre d'économie de la Sorbonne) describes Defensive strategies in the quality ladders.

ABSTRACT: This paper analyses the potentially defensive behaviour of successful innovators and its effect on aggregate R&D effort. It proposes a quality-ladders model that endogenously determines leader's technology advantages and who innovate (the leader firm or its competitors). Regulation can have either a positive or a negative effect on R&D intensity. It can be negatively associated to aggregate innovative effort in higly deregulated economies. In more regulated ones, where deterring strategies are constrained, it yields incentives to innovate. These predictions are consistent with data on manufacturing industries of 14 OECD countries between 1987-2003.

Evolution of behavior when duopolists choose prices and quantities

Posted by D. Daniel Sokol

Khan Abhimanyu and Peeters Ronald (METEOR) have posted Evolution of behavior when duopolists choose prices and quantities.

ABSTRACT: We study duopolistic competition in a differentiated market with firms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of profit maximizing firms, we assume firm behavior to be shaped by a Darwinian dynamic: the less fitter firm imitates the fitter firm and occasionally firms may experiment with a random price and/or quantity. Our two main findings are that: (i) a market clearing outcome always belongs to the set of feasible long run outcomes, but may co-exist with non-market clearing outcomes with as well excess supply as excess demand being possible; and (ii) there exist parameter configurations for which the only feasible outcomes imply prices above monopoly level.

Product innovation and imitation in a duopoly with differentiation by attributes

Posted by D. Daniel Sokol Reynald-Alexandre Laurent (PSE - Paris-Jourdan Sciences Economiques - CNRS : - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, addresses Product innovation and imitation in a duopoly with differentiation by attributes. ABSTRACT: This paper considers a probabilistic duopoly in which products are described by their specific attributes, this form of differentiation embodying the horizontal and vertical dimensions. Consumers make discrete choices and follow a random decision rule based on these attributes. A three-stage game is studied in which firms develop new attributes for their products (innovation), then may imitate the attributes of the competing product and finally compete in price. At the equilibrium, the firm selling the less appreciated product is generally incited to imitate its rival. Confronted to a threat of imitation, the benchmark firm sometimes decreases strategically its attribute index in order to diminish its unit cost of innovation and the differentiation on the market, deterring the imitation in this way. This strategy is efficient when imitation costs are sufficiently concave. In the opposite case, it is preferable for the be! nchmark firm to accept the imitation. Thus, according to the shape of imitation costs, equilibria with "deterrence" or with "accommodation" "accommodation" occur, completing the current typology of strategic responses to a threat of imitation.

As Antitrust Case Ends, Microsoft is Victorious in Defeat

Posted by D. Daniel Sokol

Robert H. Lande University of Baltimore - School of Law Norman W. Hawker Western Michigan University - Haworth College of Business argue As Antitrust Case Ends, Microsoft is Victorious in Defeat.

ABSTRACT: As the final judgment in the celebrated Microsoft case ends, this piece very briefly assesses the impact of its remedy. When evaluated in terms of its most important goals, the remedy has proven to be a failure. Microsoft's monopoly power in the PC operating systems market is now as great as it was when the case was brought in 1998 or the remedy was ordered in 2002. The article also very briefly discusses the implications of this remedy for Google and AT&T.

Perfect Surcharging and the Tourist Test Interchange Fee

Posted by D. Daniel Sokol

Hans Zenger (DG Comp) has published a paper on Perfect Surcharging and the Tourist Test Interchange Fee.

ABSTRACT: Two widely discussed pricing benchmarks in the literature on payment cards markets are the "tourist test" interchange fee (Rochet and Tirole, 2011), which internalizes usage externalities in payment card markets, and "perfect surcharging" by merchants (Rochet and Tirole, 2002). This paper shows that these benchmarks are allocatively equivalent. Implications for the regulatory treatment of interchange fees and no-surcharge rules are discussed.

Practical Aspects of Aftermarkets in European Competition Law

Posted by D. Daniel Sokol

John Temple Lang (Cleary Gottlieb, Trinity College) explores Practical Aspects of Aftermarkets in European Competition Law.

ABSTRACT: An "aftermarket" is a market for the supply of products or services needed for or in connection with the use of a relatively long-lasting piece of equipment that has already been acquired. Aftermarkets give rise to several kinds of questions under competition law. Does a relevant market for competitive analysis consist of separate markets for primary and secondary products, or is it a market for "systems" consisting of both primary and secondary products? When, if at all, is the supplier of the primary product dominant in the aftermarket for products or services needed for use with its equipment? If it is dominant, what conduct may be an abuse prohibited by Article 102 (ex-82) of what is now the Treaty on the Functioning of the European Union? This article applies well-known general principles of competition law, along with case law, to answer these questions.

Stability and Competition in Banking after the Financial Crisis

Posted by D. Daniel Sokol

The UCL Jevons Institute for Competition Law and Economics is pleased to announce that Sir John Vickers will be opening its 2011 Colloquium Debate on Stability and Competition in Banking after the Financial Crisis A debate over structural and behavioural remedies in banking in the light of the Independent Banking Commission's Interim Report  on 8 June 2011 from 4 - 7.30pm at UCL's Faculty of Laws Speaker include Sir John Vickers (ICB),  John Fingleton (OFT), Gert-Jan Koopman (European Commission), Clive Maxwell (OFT), Abel Mateus (New University of Lisbon), Charles Goodhard CBE FBA (LSE), and Vicky Pryce (FTI)  This event is accredited with 2 .5 CPD hours by the SRA and BSB Sign up online for your place by clicking on the links below or go to:  http://jevons-ibc-report.eventbrite.com/   Standard Ticket £40 (discounts for UCL alumni) Academics, Government Departments, NGO and Students are free of charge.     About this event: The recent deep financial crisis has resulted in the search for measures that could reduce the risk of a recurrence. Many have looked at whether banks tend to take on risks that the general public ends up bearing and whether regulations should reduce these negative externalities. Some have called for breaking banks up, raising capital standards, charging them for the risks they create, or impose various rules that prevent banks from creating too much systemic risk. Others have questioned whether the extent to which banking practices were really responsible for the crisis or whether the proposed constraints on banks impose more costs on banks than they are worth such as perhaps reducing bank lending that stimulates economic group. While financial regulators have been most focused on reform competition authorities are also increasingly focused on banking and, among other things, are considering the relati! onship between market structure, business practices, and system risk.   The recently released interim report by the Independent Commission on Banking, chaired by Sir John Vickers, is one of the latest attempts to consider these difficult issues. It proposed significantly increased capital requirements on banks and some fencing off of retail banking from riskier operations.   This conference brings together antitrust and financial regulation experts, including key current or former regulators from the UK and EU, to discuss these issues.    You are invited to the following event: Debate on the Stability and Competition in Banking after the Financial Crisis Date: Wednesday, June 08, 2011 from 4:00 PM - 7:00 PM (GMT) Location: UCL Faculty of Laws - Graduate Wing 1 - 2 Endsleigh Gardens WC1 London United Kingdom

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Allocating Cartel Fines Among Companies of a Group

Posted by D. Daniel Sokol

Laura Atlee & Yves Botteman (Steptoe & Johnson) provide thoughts on Allocating Cartel Fines Among Companies of a Group.

ABSTRACT: We have previously discussed the Akzo Nobel Chemicals case, in which the Court of Justice of the European Union (formerly European Court of Justice) continued to attribute joint and several liability to parent companies for cartel infringements committed by their wholly owned subsidiaries. The attribution of liability has major implications for the amount-up to 10 percent of global turnover-and payment of any fines imposed by the European Commission (the "Commission") for such infringements.

In this article, we explore how the resulting fine ought to be allocated among a parent and its subsidiaries. In Siemens AG Österreich, the General Court (the "Court") clarified that when the Commission attributes joint and several liability to a parent it must consider: (i) the periods during which the parent effectively exercised control over the subsidiaries; and (ii) allocate, if need be, the amount covered by joint and several liability among those entities in order to reflect their liability for the infringement.

Beaton-Wells and Ezrachi Respond to the Blog Symposium on Criminalising Cartels

Posted by Caron Beaton-Wells and Ariel Ezrachi

We are grateful to the reviewers for their reflections on Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart, 2011) and to Danny for convening the symposium on the book.

One of the objectives of the book was to challenge some of the key assumptions or assertions commonly made in advocacy for criminal cartel enforcement. As confessed supporters for criminalisation, two of the book reviewers reported that the book indeed had succeeded in challenging their assumptions – particularly as to the acclaimed deterrence impact of criminal sanctions. For an author or editor, first-hand feedback of this nature is highly gratifying. Each of the reviewers also reflected in their comments important themes from the book, such as the challenges involved in criminal enforcement, the cultural specificity of a criminal regime and the significance of criminalisation’s moral dimensions.

If there was one particular insight from the reviews on which we would like to comment, it was the suggestion by Anestis Papadopoulos that, for developing countries new to competition law, criminalisation should be deferred until other foundational conditions for an effective antitrust system have been bedded down (political support and incorporation into academic curricula are two such conditions mentioned). No doubt this would resonate with many who have witnessed or studied the challenges associated with legislating and building capacity for competition law and enforcement in developing countries. However, there is an alternative perspective. It might alternatively be argued that there is greater scope to provide for criminal sanctions when a competition law regime is first introduced than subsequently, once that regime is well-established. Provision for criminal sanctions from the start might offer a effective mechanism for communicating the importance attached by political leaders and policy-makers to competition as a path to economic progress, productivity and prosperity. In this way, criminalisation may be used to transmit an ideological message, should such transmission be seen as necessary or desirable. We appreciate, of course, that there are additional practical factors to be considered in relation to any such proposal. However, it is useful to recognise that criminalisation may be employed as much a tool of ideology as a weapon of enforcement.”

Congratulations to Rui Li for His Paper "Antitrust, Intellectual Property Rights, and the Online Music Industry: An Antitrust Analysis of Apple’s Combination of Services and Products"

Posted by D. Daniel Sokol

From the University of Iowa Press Release:

Rui Li, a third year law student at the University of Iowa College of Law, is the winner of the National Law Review’s Spring 2011 Legal Writing Contest.

Li’s winning paper is titled “Antitrust, Intellectual Property Rights, and the Online Music Industry: An Antitrust Analysis of Apple’s Combination of Services and Products.”

The NLR’s award is presented to articles that are straightforward and practical, containing useful information of potential interest to legal and business professionals. Li’s paper can be found online at http://www.natlawreview.com/article/antitrust-intellectual-property-rights-and-online-music-industry-antitrust-analysis-apple-s-.

HT (Jim Fishkin)

Information Exchange in Competition Law - 22 June 2011

Posted by D. Daniel Sokol

The Brussels School of Competition Law has an interesting conference coming up on Information Exchange in Competition Law.

The Institutional Framework for Doing Sports Business: Principles of EU Competition Policy in Sports Markets

Posted by D. Daniel Sokol

Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark) discusses The Institutional Framework for Doing Sports Business: Principles of EU Competition Policy in Sports Markets.

ABSTRACT: The competition rules and policy framework of the European Union represents an important institutional restriction for doing sports business. Driven by the courts, the 2007 overhaul of the approach and methodology has increased the scope of competition policy towards sports associations and clubs. Nowadays, virtually all activities of sports associations that govern and organize a sports discipline with business elements are subject to antitrust rules. This includes genuine sporting rules that are essential for a league, championship or tourna-ment to come into existence. Of course, ‘real’ business or commercial activities like ticket selling, marketing of broadcasting rights, etc. also have to comply with competition rules. Regulatory activities of sports associations comply with European competition rules if they pursuit a legitimate objective, its restrictive effects are inherent to that objective and proportionat! e to it. This new approach offers important orientation for the strategy choice of sports associations, clubs and related enterprises. Since this assessment is done following a case-by-case approach, however, neither a blacklist of anticompetitive nor a whitelist of procompetitive sporting rules can be derived. Instead, conclusions can be drawn only from the existing case decisions – but, unfortunately, this leaves many aspects open. With respect to business activities, the focus of European competition policy is on centralized marketing arrangements bundling media rights. These constitute cartels and are viewed to be anticompetitive in nature. However, they may be exempted from the cartel prohibition on efficiency and consumer benefits considerations. Here, a detailed list of conditions exists that centralized marketing arrangements must comply with in order to be legal. Although this policy seems to be well-developed at first sight, a closer look at the decision practic! e reveals several open problems. Other areas of the buying and selling behavior of sports associations and related enterprises are considerably less well-developed and do not provide much orientation for business. The author would like to thank Arne Feddersen and the participants of the 2nd European Conference on Sports Economics (German Sports University Cologne, 2010) for valuable comments on earlier versions of this paper.

Efficiency or Competition? A Structural Analysis of Canada's AWS Auction and the Set-Aside Provision

Posted by D. Daniel Sokol K

yle Hyndman (Southern Methodist University) and Christopher F. Parmeter (University of Miami) explain Efficiency or Competition? A Structural Analysis of Canada's AWS Auction and the Set-Aside Provision.

ABSTRACT: In 2008 Industry Canada auctioned 105MHz of spectrum to a group of bidders that included incumbents and potential new entrants into the Canadian mobile phone market, raising $4.25 billion. In an effort to promote new entry, 40MHz of spectrum was set-aside for new entrants. We adapt the methodology of Bajari and Fox (2009) to the Canadian auction setting in an effort to estimate the implicit cost (in terms of lower auction efficiency) of this policy. Our results indicate that revenue would have been approximately 10% higher without the set-aside.

Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?

Posted by D. Daniel Sokol

David Granlund, Department of Economics, Umea University) and Miyase Yesim Koksal (Department of Economics, School of Business, Economics and Law) ask Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?

ABSTRACT: What has been the effect of competition from parallel imports on prices of locally-sourced on-patent drugs? Did the 2002 Swedish mandatory substitution reform increase this competition? To answer these questions, we carried out difference-in-differences estimation on monthly data for a panel of all on-patent prescription drugs sold in Sweden during the 40 months from January 2001 through April 2004. On average, facing competition from parallel imports caused a 15-17% fall in price. While the reform increased the effect of competition from parallel imports, it was only by 0.9%. The reform, however, did increase the effect of therapeutic competition by 1.6%.