Antitrust & Competition Policy Blog

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

Thursday, June 30, 2011

Deng on Fiona M. Scott Morton: Letting the Data Speak

Posted by D. Daniel Sokol

Fei Deng (NERA) discusses Fiona M. Scott Morton: Letting the Data Speak.

ABSTRACT:The article examines the published work of Fiona Scott Morton, the new Deputy Assistant Attorney General for Economic Analysis at the Department of Justice, and concludes that she is pragmatic, non-doctrinaire, and highly data-driven.

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

Reframing Antitrust in Light of Scientific Revolution: Accounting for Transaction Costs in Rule of Reason Analysis

Posted by D. Daniel Sokol

Alan Meese (William & Mary Law) has a new article titled Reframing Antitrust in Light of Scientific Revolution: Accounting for Transaction Costs in Rule of Reason Analysis.

ABSTRACT: This Article examines antitrust law’s failure to incorporate fully the lessons of transaction cost economics (“TCE”) when conducting rule of reason analysis under Section 1 of the Sherman Act. In particular, the article contends that modern rule of reason analysis, informed by workable competition’s partial equilibrium trade-off paradigm, is suitable for evaluating only a subset of agreements that may reduce transaction costs. To this end, the Article distinguishes between "technological" and "non-technological" transaction costs. Technological transaction costs entail the bargaining and information costs first emphasized by Ronald Coase, whose work sparked the transaction cost revolution. By contrast, non-technological transaction costs result from more fundamental departures from perfect competition of the sort stressed by Oliver Williamson, departures that create a risk of opportunism that accompanies relationship-specific investments.

The article demonstrates that modern rule of reason analysis, heavily influenced by the Harvard School of Antitrust, employs the partial equilibrium trade-off model to evaluate restraints challenged under Section 1. Modern law does accurately assess restraints that may reduce technological transaction costs - costs analogous to the sort of production costs recognized by the partial equilibrium trade-off model. However, this same methodology is poorly suited for analyzing restraints that may reduce non-technological transaction costs. To be precise, the model treats non-restraint price and output as a "competitive" baseline against which to measure a restraint’s impact, even when the restraint avoids per se condemnation because it may overcome market failure. As a result, tribunals applying the trade-off model may misinterpret benefits of such restraints, such as increased investment and resulting higher prices, as exercises of market power. Given the baselines that courts use, a test focused on price or output will mistakenly condemn many restraints that enhance welfare.

Several considerations explain courts’ failure to incorporate the lessons of TCE when analyzing contracts that may reduce non-technological transaction costs. For one thing, the trade-off paradigm has shed light on important antitrust problems, and practitioners of a successful paradigm do not readily abandon it. Moreover, Coase’s seminal work on TCE focused exclusively on technological transaction costs analogous to ordinary production costs easily recognized within the trade-off paradigm and thus did not cast doubt on that model. Furthermore, proponents of TCE actually embraced and refined the trade-off model for analyzing mergers producing technological efficiencies, thereby bolstering the model’s apparent usefulness. Finally, lower courts have modified aspects of the modern rule of reason test, saving beneficial restraints from condemnation and staving off anomalies that can undermine a paradigm’s support.

Given the trade-off paradigm’s shortcomings, courts should "reframe" their analysis, selecting a different baseline against which to measure the impact of restraints that may reduce non-technological transaction costs. That is, tribunals should ask whether the restraint produces higher prices (or lower output) compared to the prices or output that would obtain if the defendants made specific investments without a safeguard against opportunism. Such an approach would hold constant the other variables that influence price and output, thereby isolating the impact of the restraint simpliciter on market power and/or transaction costs.

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

Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market

Posted by D. Daniel Sokol

In Bae Ji, Korea Rural Economic Institute and Chanjin Chung, Oklahoma State University describe Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market.

ABSTRACT: The new empirical industrial organization approach with the Bertrand model is employed to measure the oligopsony market power in the U.S. cattle procurement market. The assumption of price competition (Bertrand model) based on the nature of cattle production such as cattle cycle and seasonality is used and compared to quantity competition (Cournot model). The empirical results show that the oligopsony market power exists in the U.S. cattle procurement market. The cattle cycle and seasonality affect the oligopsony market power and the cattle cycle causes the change of market power. However, concentration has a negative effect on the oligopsony market power.

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

Private Benefits and Product Market Competition

Posted by D. Daniel Sokol

Jacques Thepot, University of Strasbourg has posted Private Benefits and Product Market Competition.

ABSTRACT:The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which are passed through the organizational structure and create price distortion in the downstream product market. For a wide range of industry concentrations, we prove that this may affect the profit (i.e. the value) of the firms in a positive sense since the intensity of rivalry is curbed by the cost increase. This reduces incentive to merge in the industry; antitrust implications are therefore discussed. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competition policy in industries where managerial opportunism generates expropriation costs.

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

International Competition Enforcement Law between Cooperation and Convergence

Posted by D. Daniel Sokol

Jorg Philipp Terhechte, University of Hamburg has posted International Competition Enforcement Law between Cooperation and Convergence.

ABSTRACT: International Competition Enforcement Law is a new field of research in jurisprudence which, until now, has attracted little attention. Academic debate has, in recent years, concentrated almost entirely on substantive law. Such an imbalanced focus, however, risks losing sight of the fact that the differing procedures, complex networks of cooperation between authorities and courts, and also the diverse organizational structures of the authorities all have an influence on the decision-making process in a manner which ought not to be underestimated. Whereas an increasing convergence of national, international and supranational law may be observed in the field of substantive law, enforcement law is character-ized by a wide range of different approaches, as well as the complexity which necessarily accompanies such diversity in approach. A closer look at International Competition Enforcement Law quickly reveals a multitude of national cartel and competition laws (approximately 100 at the moment), all of which feature different procedural quirks. Furthermore, there is supranational law and, in particular, with respect to procedure, complicated EU law, as well as variety of regional regimes (for example, MERCOSUR or NAFTA), all of which are based on completely different procedural traditions. Lastly, there are several international bodies (for example, the WTO or OECD) which aim at harmonizing and/or shaping procedural rules. These differences in regulation pose the question whether it is indeed possible to create a set of common principles for competition and merger control law. This is the premise of this book, which discusses the most important national procedural rules, while also exploring links to supranational and international law and analyzing the comprehensive cooperative networks. With this approach, it is possible to delineate the general structures and basic principles of International Competition Enforcement Law and piece them together.

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

Wednesday, June 29, 2011

Market Power and Shadow Prices for Nonrenewable Resources: An Empirical Dynamic Model

Posted by D. Daniel Sokol

C.-Y. Cynthia Lin Department of Agricultural and Resource Economics, UC Davis and Wei Zhang Department of Agricultural and Resource Economics, UC Davis explores Market Power and Shadow Prices for Nonrenewable Resources: An Empirical Dynamic Model.

ABSTRACT: This paper estimates a dynamic model of the world market for nine nonrenewable resources over the period 1970-2004, and tests whether the countries supplying a nonrenewable resource behaved as price-takers or oligopolists. The model generates estimates of the shadow price of the nine minerals with minimal functional form assumptions. The results show that the countries supplying hard coal, lead, and oil behaved as oligopolists during the study period, while the world market for other nonrenewable resources could be characterized as perfectly competitive. The shadow prices do not increase monotonically, which is evidence for stock effects in extraction costs. The shadow prices of most minerals peaked between 1970 and 1980.

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

Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It

Posted by D. Daniel Sokol

Alan Meese (William & Mary Law) has posted Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It.

ABSTRACT: This article demonstrates that courts, particularly the Supreme Court, have embraced a total welfare approach when articulating and applying Section 2 doctrine. During antitrust’s formative era, courts created a safe harbor for so-called “normal” or “ordinary” conduct, regardless whether such conduct led to higher prices for purchasers. More recently, decisions such as Eastman Kodak v. Image Technical Services, Brooke Group v. Brown and Williamson Tobacco, and Aspen Skiing v. Aspen Highlands all announce and apply tests that immunize practices producing significant economic benefits, without regard to the impact such practices might have on purchaser prices. This doctrinal result, also endorsed by various lower courts, is most consistent with a total welfare standard, given the prediction by the partial equilibrium tradeoff model that non-trivial efficiencies resulting from a monopolist’s conduct will usually outweigh the deadweight loss caused by monopoly pricing and output reduction. While some opinions, notably the now-discredited Alcoa decision, rejected a total welfare approach, none embraced a “purchaser welfare” account of Section 2. In fact, courts have never made Section 2 liability turn on whether a monopolist’s conduct results in higher prices.

The modern commitment to total welfare is not a recent phenomenon associated with Robert Bork and the Chicago School. Instead, the Harvard School of antitrust policy, led by Edward Mason, Donald Turner, and Carl Kaysen embraced a total welfare approach to Section 2 doctrine in the decade before Bork advocated this standard. In particular, the Harvard School argued that so-called “competition on the merits,” including the realization of economies of scale, above-cost pricing and product innovation, should be lawful per se, without regard to whether such conduct excludes rivals and results in higher purchaser prices. The desire to protect competition on the merits and practices that further such competition reflected a more general Harvard School “total welfare” approach to the antitrust problems, an approach exemplified by Turner and Kaysen’s argument that mergers necessary to achieve significant efficiencies should be lawful, again without regard to price effects. The Supreme Court expressly endorsed the Harvard School’s definition of unlawful exclusionary conduct in Aspen Skiing, simultaneously embracing the definition articulated by Robert Bork.

To be sure, the Harvard and Chicago Schools sometimes disagree about the appropriate content of antitrust doctrine in the Section 2 context. However, such disagreement, when it occurs, reflects disparate evaluations of the economic impact of monopolists’ conduct, evaluations unrelated to the two schools’ common normative commitment to a total welfare standard. Those who advocate repudiation of this longstanding scholarly and judicial normative consensus bear a heavy burden of explaining why courts should suddenly reverse themselves and adopt the completely novel purchaser welfare standard, twelve decades after Congress passed the Sherman Act.

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

The Judicial Control of Business: Walton Hamilton, Antitrust, and Chicago

Posted by D. Daniel Sokol

Malcolm Rutherford (University of Victoria - Economics) has an article on The Judicial Control of Business: Walton Hamilton, Antitrust, and Chicago

ABSTRACT:The institutionalist approach to law and economics declined markedly after the Second World War and was replaced by a very different law and economics literature associated with the Chicago School. This literature represented a clear rejection of the institutionalist arguments for more social control and a renewed emphasis on the market and the ability of market forces to generate efficient results. The Chicago School saw government intervention much more as the source of problems rather than the solution. There are, however, links between the Chicago School and the institutionalists. Both contain discussions of court decision-making, both contain important considerations concerning antitrust and patent law, and both deal with issues of agency capture and the use of government regulations as barriers to entry.

This Article begins by examining the institutionalist approach to the issues of law and economics, concentrating on the work of Walton Hamilton. Hamilton devoted considerable attention to the issues of judicial decision-making, and to antitrust and patents in particular. He was closely involved in various phases of the New Deal: in the Consumers’ Advisory Board of the National Recovery Administration; in a series of important studies of pricing in a wide variety of markets; and in work with Thurman Arnold on antitrust and patents. The Article will then briefly discuss the Chicago School of law and economics with a concern for both the points of difference and points of contact between the Chicago and institutionalist literatures.

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

Chicago’s Shifting Attitude Toward Concentrations of Business Power (1934–1962)

Posted by D. Daniel Sokol

Robert Van Horn (University of Rhode Island) has a very interesting essay on Chicago’s Shifting Attitude Toward Concentrations of Business Power (1934–1962).

Highly recommended! ABSTRACT: The postwar Chicago School is commonly associated with a pro-corporate standpoint because of its position toward antitrust law and business monopoly. For example, starting in the 1950s, Aaron Director—who is often considered the father of Chicago law and economics—and his students, such as John McGee, defended the practices of the Standard Oil Company, arguing that the Supreme Court’s holding against the company in 1911 was erroneous. Since that time, Chicago has been associated with the position that competition has a self-correcting power, ensuring that monopoly power is short-lived. Members of the Chicago School did not always take a pro-corporate position. In the 1930s, for example, the respected University of Chicago professor and self-identified classical liberal, Henry Simons, described monopoly in all its forms, including “gigantic corporations” and “other agencies for price control,” as “the great enemy of democracy.” For Simons, concentrations of power undermined the necessary condition for democracy to flourish, namely, a competitive market. Besides Simons, Jacob Viner, the infamous Chicago price-theory guru and self-proclaimed classical liberal, also opposed concentrations of business power. Viner’s views on business monopoly in the late 1930s can be gleaned from his correspondence with Laird Bell, a distinguished attorney and public benefactor of Chicago. In writing Bell, Viner acknowledged that big business had some benefits, but emphasized, “[T]he mere size of business units tends almost inevitably to result in attempts to escape the impact of competition which have important—and in my opinion highly desirable—consequences for the operation of the economic system.” Viner considered this to be “the most important economic issue of our day” because “‘bigness’ . . . is the essential element in the faulty working . . . of our economic system.” This Essay traces the development of the Chicago School’s changing position toward concentrations of business power. In Parts II and III, the Essay details the Chicago School’s early position of broad hostility toward concentrations of business power and its belief that such concentrations of power needed to be eradicated by vigorous antitrust enforcement and radical corporate reform. Then, in Part IV, the Essay charts the Chicago School’s shift during the Free Market Study toward a broad acceptance of concentrations of power and a position that large corporations and industrial monopoly were relatively benign. This Essay argues that the Chicago School’s shift toward concentrations of power was a product of the postwar Chicago School’s effort to reconstitute liberalism as a bulwark against collectivist challenges and increasing government regulation of business.

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

Tuesday, June 28, 2011

Online Distribution of Copyright Works: Judge Chin Rejects Google Books Settlement

Posted by D. Daniel Sokol

Isabel Davies & Holly Strube (Boyes Turner) discuss Online Distribution of Copyright Works: Judge Chin Rejects Google Books Settlement.

ABSTRACT: In the first article on this topic, we discussed the position following the first draft settlement agreement in the Google Books dispute, presenting it in a broader European policy context. However, for those who don't recall the article, the background to this case is as follows. In the autumn of 2005 the Author's Guild and the Association of American Publishers brought a class action lawsuit against Google challenging the scanning in of in-copyright books. Under U.S. law, court approval is required for the settlement of a class action. The judge presiding over the case is required to determine whether any settlement reached is fair, reasonable, and adequate to the class on whose behalf it was negotiated.

The parties produced a first draft settlement agreement.  However, this was amended due to the number of objections lodged, in particular by the U.S. Department of Justice. The fairness hearing in relation to this Google Books settlement agreement was held on February 18, 2010. Judge Chin, presiding, took into consideration strong opposition from the Department of Justice, governments of France and Germany, Google's most prominent competitors, public interest organizations, and hundreds of authors and publishers and turned it down. The amended settlement agreement was presented to Judge Chin; his judgment on this amended agreement was handed down in March 2011.

This article will first look at this Amended Settlement Agreement ("ASA), which was before Judge Chin for his consideration, and then Judge Chin's decision. It will look at potential changes to copyright law and, finally, it will look at the European Commission's current position on mass digitization.

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

Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market

Posted by D. Daniel Sokol

In Bae Ji Researcher, Korea Rural Economic Institute and Chanjin Chung, Professor Oklahoma State University explain Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market.

ABSTRACT: The new empirical industrial organization approach with the Bertrand model is employed to measure the oligopsony market power in the U.S. cattle procurement market. The assumption of price competition (Bertrand model) based on the nature of cattle production such as cattle cycle and seasonality is used and compared to quantity competition (Cournot model). The empirical results show that the oligopsony market power exists in the U.S. cattle procurement market. The cattle cycle and seasonality affect the oligopsony market power and the cattle cycle causes the change of market power. However, concentration has a negative effect on the oligopsony market power.

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

Market Power in the Carbonated Soft Drink Industry

Posted by D. Daniel Sokol

William J. Allender (Arizona State University) and Timothy J. Richards (Arizona State University) focus a paper on Market Power in the Carbonated Soft Drink Industry.

ABSTRACT: We investigate the strategic pricing for leading brands sold in the carbonated soft drink (CSD) market in the context of a flexible demand specification (i.e. random parameter nested logit) and a structural pricing equation. Our approach does not rely upon the often used ad hoc linear approximations to demand and profit-maximizing first-order conditions. We estimate the structural pricing equation using four different estimators (i.e. OLS, LIML, 2SLS, and GMM) and compare the implied deviation from Bertrand-Nash competition. Our results suggest that retailers, on average, price CSD brands below their cost, likely a result of the competitive retailing environment. We also find CSD wholesalers price their brands significantly more cooperatively than Bertrand-Nash would suggest, thus inflating profits.

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

Structural Model of Retail Market Power: The U.S. Milk Industry

Posted by D. Daniel Sokol

Vardges Hovhannisyan (Department of Agricultural and Applied Economics University of Wisconsin-Madison) and Brian W. Gould (Department of Agricultural and Applied Economics University of Wisconsin-Madison) create a Structural Model of Retail Market Power: The U.S. Milk Industry.

ABSTRACT: The objective of our research is to investigate retailer market conduct in the sale of beverage milk using a structural model of consumer behavior and retailer optimality conditions that embrace a range of competitive scenarios. The study is based on an aggregate level analysis of retailer behavior with milk quantity used as a strategic variable. We contribute to the literature by employing a Generalized Quadratic Almost Ideal Demand System (GQAIDS) to model milk demand. Furthermore, we derive the retailer optimality conditions that incorporate the slopes of inverse GQAIDS demand curves for the products under study. Lastly, we apply this generalized structural model to study the retailer behavior in marketing national brand (NB) and private label (PL) milk. The market in question is rather concentrated at the downstream level; however we believe that the retailer behavior is most consistent with a competitive atmosphere. Moreover, the results support the conjecture that retailers mainly use the leading NB milk to assure some store traffic while utilizing PL brands for rent extraction.

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

PRICE DISPERSION, SEARCH COSTS AND CONSUMERS AND SELLERS HETEROGENEITY IN RETAIL FOOD MARKETS

Posted by D. Daniel Sokol

Giovanni Anania and Rosanna Nisticò (Dipartimento di Economia e Statistica, Università della Calabria) discuss PRICE DISPERSION, SEARCH COSTS AND CONSUMERS AND SELLERS HETEROGENEITY IN RETAIL FOOD MARKETS.

ABSTRACT: Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing strategies; these differences emerge both at the firm level, and for supermarkets within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. From the results presented in the paper, it is clear that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers t! o remain in business.

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

Monday, June 27, 2011

Internet Search Competition: Where’s the Beef?

Posted by D. Daniel Sokol

David Balto (Center for American Progress) asks Internet Search Competition: Where’s the Beef?

June 27, 2011 | Permalink | Comments (0) | TrackBack (0)

Generic Advertising in Concentrated and Differentiated Agricultural Markets

Posted by D. Daniel Sokol

Sungill Han, Department of Livestock Business and Marketing Economics Konkuk University, Chanjin Chung Department of Agricultural Economics, Oklahoma State University, and Daeseok Suh Korean Rural Economic Institute explore Generic Advertising in Concentrated and Differentiated Agricultural Markets.

ABSTRACT: This study develops an analytical framework to examine the impact of generic advertising on brand advertising with alternative assumptions on demand changes (shift-up and rotation), product differentiation, market concentration, and relationship between commodity and brand advertising programs. The newly developed model allows one to determine the relationship between generic and brand advertising, which has not been clearly shown in previous studies. Analytical results show that when generic advertising leads to an inelastic demand, generic advertising would help brand advertising and could decrease the optimal brand advertising expenditures. However, when generic advertising leads to an elastic demand, it would negatively affect the profitability of brand advertising.

June 27, 2011 | Permalink | Comments (0) | TrackBack (0)

Effect of Plant Location Decisions on Raw Material Input Prices

Posted by D. Daniel Sokol

Diana M. Burton (Ecosystem Science and Management, Agricultural Economics, Texas A&M University) and H. Alan Love (Information & Operations Management, Agricultural Economics Texas A&M University) write on the Effect of Plant Location Decisions on Raw Material Input Prices.

ABSTRACT: In processing industries, plant location decisions are costly and have consequences for firm profitability. When raw materials are heavy or perishable, transportation costs limit shipping distances and processors must compete locally for raw material inputs. To determine the likely profitability of a new plant, a processor must forecast the effect entry will have on local post-entry raw material price. This requires anticipating how entry will affect market structure and intensify competition for raw materials. Using an econometric representation of game-theoretic Nash equilibria relating input prices to processor competition in local procurement areas, an empirical model is developed to ex ante forecast the likely impact of entry on input price. The methods developed are applicable to a wide variety of industries where historic data are available.

June 27, 2011 | Permalink | Comments (0) | TrackBack (0)

C.D. Howe Institute: Abolish Ownership Restrictions in Telecommunications

Posted by D. Daniel Sokol

Canada's C.D. Howe Institute Competition Policy Council has published a report advocating that Canada Abolish Ownership Restrictions in Telecommunications.

June 27, 2011 | Permalink | Comments (0) | TrackBack (0)

Formation of Decentralized Manufacturer-Supplier Networked Market

Posted by D. Daniel Sokol

Yasuhiro Shirata (Graduate School of Economics, Hitotsubashi University) analyzes Formation of Decentralized Manufacturer-Supplier Networked Market.

ABSTRACT: This paper studies trading in a two-sided market where firms strategically form a network. In a networked market, manufacturers and suppliers must be connected by links for trading. We show that if no contingent contract is available, then any pairwise Nash stable network is inefficient. Each supplier under-invests in links (a hold-up problem). If a contract contingent on direct links is available and link cost is low, then the under-investment problem solves. Furthermore, the complete network resulting in the Walrasian outcome is uniquely pairwise Nash stable. However, this outcome is also inefficient. A new hold-up problem, over-investment in links, arises.

June 27, 2011 | Permalink | Comments (0) | TrackBack (0)

An Experimental Contribution to the Revision of the Guidelines on Research and Development Agreements

Posted by D. Daniel Sokol

Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn) analyzes An Experimental Contribution to the Revision of the Guidelines on Research and Development Agreements.

ABSTRACT: The European Commission is working on a revision of its Guidelines on Research and Development Agreements. On this occasion, this note surveys the existing experimental evidence. Experiments add a number of additional arguments to the normative assessment. R&D agreements have a much smaller effect on later competition in the product market if they serve as a substitute for incomplete (legal) protection of innovation effort. They may help firms settle the resulting fairness issue, and stay away from investment wars. Using the results from 107 published experiments on oligopoly, a meta-study shows that clearing an R&D agreement can be beneficial since it removes the additional collusion incentive resulting from fear that, through successful innovation, competitors might gain an advantage. This is the case if the opposite market side has countervailing power, and the more market conditions are stable. By contrast, t! he meta-data suggests that R&D agreements increase the risk of collusion in the product market if products are substitutes, if capacity cannot immediately be extended, if market participants may communicate, and if they are experienced; the latter two conditions are very likely to hold in the field.

June 27, 2011 | Permalink | Comments (1) | TrackBack (0)