Antitrust & Competition Policy Blog

COMPETITION POLICY: IS IT BAD FOR BUSINESS?

Posted by D. Daniel Sokol

Wan Liza (University of Wisconsin Madison, Wisconsin, USA and Private Law Department, IIUM) asks COMPETITION POLICY: IS IT BAD FOR BUSINESS?

ABSTRACT: Of late, the element of competition has posed to be a conundrum to the emerging economies; Malaysia is no exception. Selection of economies theories indicated; competition has been used in innumerable sense. Entrepreneurial competition among producers defines competition as an attempt to offer product at lower prices, in contrast to the adjective; competition policy denotes deregulation of markets with a framework that elevates market disciplines, eliminates distortion and promotes economic efficiency. In developing a competitive framework: a significant question arose; does competition policy merely generates economic efficiency? Empirical analysis on trade and communication has indicated positive impacts. However, competition in Malaysia i.e. implemented through sector regulation; for example in electricity generation has shown little changes on economic efficiency and other benefits. This paper suggests competition po! licy advocates economic advantages and maximization of other benefits i.e. customer welfare. Simultaneously effects business dynamics. The key to workable ‘model’ originates from strong and independent structural and administrative implementation of the policy. This research reiterates plausible arguments of the benefits i.e. competitive markets generate efficiency and allow for the reflection of true prices in the markets. Alternatively, it also highlights competition impacts on business dynamics and cognizance of Malaysian Competition Act 2010.

Fight Cartels or Control Mergers? On the Optimal Allocation of Enforcement Efforts within Competition Policy

Posted by D. Daniel Sokol

Andreea Cosnita-Langlais and Jean-Philippe Tropeano (both University of Paris) ask Fight Cartels or Control Mergers? On the Optimal Allocation of Enforcement Efforts within Competition Policy.

ABSTRACT: This paper deals with the optimal enforcement of the competition law between the merger and anti-cartel policies. We examine the interaction of these two branches of the competition policy given the budget constraint of the competition agency and taking into account the ensuing incentives for firms’ behavior in terms of choice between cartels and mergers. We are thus able to conclude on the optimal competition policy mix. We show for instance that to the extent that a tougher anti-cartel action triggers more mergers taking place, the public agency will optimally invest only in control fighting for a tight budget, and then in both instruments as soon as the budget is no longer tight. However, if the merger’s coordinated effect is taken into account, then when resources are scarce the agency may optimally have to spend first on controlling mergers before incurring the cost of fighting cartels.

Entry deterrrence via renegotiation-proof non-exclusive contracts

Posted by D. Daniel Sokol

Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON) and Julian Wright (Department of Economics, National University of Singapour) explore Entry deterrrence via renegotiation-proof non-exclusive contracts.

ABSTRACT: We establish the entry-deterring role of vertical contracts in a setting that does not rely on asymmetric information, the exclusivity of the incumbent’s contracts, limits on distribution channels, or restrictions on the ability to renegotiate contracts in case of entry. The optimal contract we describe is a three-part quantity discounting contract that involves the payment of an allowance to the downstream firm and a marginal wholesale price below the incumbent’s marginal cost for sufficiently large quantities.

The Unilateral Conduct Working Group: You be the Judge - Scrutinizing a Loyalty Discount & Rebate Case

Posted by D. Daniel Sokol

Cynthia Lagdameo (FTC) & Charles Webb (Baker Botts) discuss The Unilateral Conduct Working Group: You be the Judge - Scrutinizing a Loyalty Discount & Rebate Case.

ABSTRACT: Pricing has never been more complex for companies operating across national borders. In addition to considerations arising from local supply and demand conditions and factors such as national tax laws and exchange rates, companies operating internationally must also take into account the potential effects that different countries' competition laws may have on their pricing practices. And over the past two decades, competition laws have proliferated to more than one hundred countries around the world, from micro-states such as Jersey and the Faroe Islands to rising economic superpowers such as Brazil, India and China.

The competition laws in virtually all of these countries potentially apply to the unilateral pricing conduct of firms found to have a dominant position. The standards for judging pricing conduct-such as loyalty or bundled discounts, predatory pricing, excessive pricing, margin or price squeezes, and discriminatory pricing-differ across jurisdictions, sometimes substantially. Even standards within individual jurisdictions can be unsettled or in a state of transition. Likely in no other area of competition law are standards so unsettled.

One of the reasons for the widely differing views on a dominant firm's pricing conduct is that pro-competitive and anticompetitive behavior often look the same-conduct that may be efficiency enhancing may look the same as conduct that excludes potential entry and forecloses rivals. Virtually all antitrust practitioners would agree that conduct such as competitors agreeing to set prices or divide markets is harmful to consumer welfare and thus must be prohibited. But what about a dominant firm providing discounts or rebates on the sale of its products or services? Consumers and customers, of course, benefit from reduced prices, which are exactly the type of behavior one would expect to see in a competitive market. However, can a dominant firm's prices be too low-even if not necessarily below its own costs-in a way that results in harm to competition? In such circumstances, how is competitive harm measured?

These types of difficult questions involving a dominant firm's discounting practices were recently analyzed by members of the Unilateral Conduct Working Group ("UCWG") at the 10th Annual Conference of the International Competition Network ("ICN") in The Hague, Netherlands in May 2011. They were analyzed through the use of a hypothetical abuse of dominance case concerning a company called "Cerveja."

Vertical Limit pricing

Posted by D. Daniel Sokol

Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON) and Julian Wright (Department of Economics, National University of Singapour) address Vertical Limit pricing.

ABSTRACT: A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.

Game complete analysis of Bertrand Duopoly

Posted by D. Daniel Sokol

Dr. David Carfì, University of Messina, Faculty of Economics and Emanuele Perrone, University of Messina undertake a Game complete analysis of Bertrand Duopoly.

ABSTRACT: In this paper we apply the Complete Analysis of Differentiable Games (introduced by D. Carfì in [3], [6], [8] and [9]) and al-ready employed by himself and others in [4], [5], [7]) to the classic Bertrand Duopoly (1883), classic oligopolistic market in which there are two enterprises producing the same commodity and selling it in the same market. In this classic model, in a competitive background, the two enterprises employ as possible strategies the unit prices of their product, contrary to the Cournot duopoly, in which the enterprises decide to use the quantities of the commodity produced as strategies. The main solutions proposed in literature for this kind of duopoly (as in the case of Cournot duopoly) are the Nash equilibrium and the Collusive Optimum, without any subsequent critical exam about these two kinds of solutions. The absence of any critical quantitative analysis is due to the relevant lack of knowledge r! egarding the set of all possible outcomes of this strategic interaction. On the contrary, by considering the Bertrand Duopoly as a differentiable game (games with differentiable payoff functions) and studying it by the new topological methodologies introduced by D. Carfì, we obtain an exhaustive and complete vision of the entire payoff space of the Bertrand game (this also in asymmetric cases with the help of computers) and this total view allows us to analyze critically the classic solutions and to find other ways of action to select Pareto strategies. In order to illustrate the application of this topological methodology to the considered infinite game, several compromise pricing-decisions are considered, and we show how the complete study gives a real extremely extended comprehension of the classic model.

Open Innovation in a Dynamic Cournot Duopoly

Posted by D. Daniel Sokol

Irina Hasnas, Department of Economics, University of Bologna, Luca Lambertini, ENCORE, University of Amsterdam and Arsen Palestini MEMOTEF, University of Rome ”La Sapienza”explore Open Innovation in a Dynamic Cournot Duopoly.

ABSTRACT: We analyze an Open Innovation process in a Cournot duopoly using a differential game approach where knowledge spillovers are endogenously determined via the R&D process. The game produces multiple steady states, allowing for an asymmetric solution where a firm may trade off the R&D investment against information absorption from the rival.

Product innovation when consumers have switching costs

Posted by D. Daniel Sokol

Evens Salies (Observatoire Francais des Conjonctures Economiques) has written on Product innovation when consumers have switching costs.

ABSTRACT: Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with firstmover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, which must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.

Maureen K. Ohlhausen Nominated to be Commissioner of the FTC to Replace Bill Kovacic

Posted by D. Daniel Sokol

President Obama has nominated Maureen K. Ohlhausen, a partner at Wilkinson Barker to replace Bill Kovacic as FTC Commissioner.  Ohlhausen undertook very importnat work as the head of the Office of Policy Planning at the FTC in the mid 2000s.  This is a very strong pick and someone who will probably continue to promote the importance of competition advocacy work at the FTC. 

As someone who has written on the importance of competition advocacy (see for example here), I am thrilled by this choice. Also as a plug, Volume III of my Stanford University Press series Global Competition Law and Economics will be devoted to Competition and the Role of the State.

I will have a separate post on Bill Kovacic who in my mind makes the list of best Commissioners of all time at the FTC.  Is he FTC equivalnet of Jordon, Chaimberlin, Russell or Abdul-Jabbar?  I would love non-anonymous comments.

Price competition on networked duopolistic markets

Posted by D. Daniel Sokol

Zakaria Babutsidze- OFCE and SKEMA Business School discusses Price competition on networked duopolistic markets.

ABSTRACT: In standard Bertrand model duopolists compete on perfect markets. How- ever, not many markets are perfect. In fact most of the markets have certain structure, and this structure is known to producers. We describe the market organization by modeling consumer-producer networks and demonstrate that if this structure is known to producers implications of the price competition depart substantially from the ones predicted by standard models. In particu- lar we show that multiple pure strategy equilibria can emerge. We investigate the role of rm and consumer heterogeneity towards sustaining price dispersion as an equilibrium outcome. It turns out that if consumers are homogenous we need large dose of rm heterogeneity in order to sustain price dispersion in equilibrium. However, if consumers are heterogenous even small asymme- tries across producers imply price dispersion. It is also predicted that larger consumer heterogeneity leads to higher prices in equilibrium.

Price Setting in a Leading Swiss Online Supermarket

Posted by D. Daniel Sokol

Martin Berka (Victoria University of Wellington), Michael B. Devereux (University of British Columbia) and Thomas Rudolph (St. Gallen) discuss Price Setting in a Leading Swiss Online Supermarket.

ABSTRACT: We study a newly released data set of scanner prices for food products in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.

Bank Market Structures and Performance Around the World

Posted by D. Daniel Sokol

Andreas Dietrich, Lucerne University of Applied Sciences and Arts and Andreas Walter Mattig, University of Saint Gallen examine Bank Market Structures and Performance Around the World.

ABSTRACT: This paper revisits the old discussion of the applicability of structure-conduct-performance models to the banking industry. In contrast to earlier (single) country studies, we aimed at providing an overview of how it would look like, if the model indeed would be applied over time and across a non-biased selection of a multi-country study. By analyzing 105 countries, we find – in line with parts of the earlier theoretical literature – a large variance, in terms of countries in which the model actually seems to work. This leads us into looking for actual reasons that determine the applicability of the structure-conduct-performance concept and the institutional and legal environment that allow increased profitability through collusion. We find drivers for this applicability more based on the macro level than on the bank-specific level.

Apprendi Applies to Antitrust Case

Posted by D. Daniel Sokol

Over at the White Collar Blog Prof, Ellen Podgor has blogged on United States v. Au Optronics Corporation, et. al.

The International Competition Network Cartel Working Group-Past, Present, and Future

Posted by D. Daniel Sokol

Marcus Bezzi (Australian Competition and Consumer Comm.) & Jozsef Sarai (Hungarian Competition Auth.) discuss The International Competition Network Cartel Working Group-Past, Present, and Future.

ABSTRACT: The trend towards globalized economies and the increasingly global nature of product and service markets, perhaps unsurprisingly, has also led to cross-border and global-cartel activity. At its 3rd Annual Conference, as a response to this development, the International Competition Network ("ICN") decided to establish a new working group to organize the ICN's anti‑cartel enforcement activities in a way that would provide competition agencies with a much greater capacity to provide a coordinated response to globalized cartel activity. The ICN Cartel Working Group ("CWG") began its operation in 2004‑2005. The CWG's current mandate is to: "address the challenges of anti-cartel enforcement, including the prevention, detection, investigation and punishment of cartel conduct, both domestically and internationally, across the entire range of ICN members with differing levels of experience and resources. At the heart of antitrust enforcement is the battle against hardcore cartels directed at price fixing, bid rigging, market allocation and output restriction."

The Empirical Content of Cournot Competition

Posted by D. Daniel Sokol

Laurens Cherchye, Catholic University of Leuven (KUL), Erasmus Research Institute of Management (ERIM), Thomas Demuynck, Catholic University of Leuven (KUL) - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics, and Bram De Rock, Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) discuss The Empirical Content of Cournot Competition.

ABSTRACT: We consider the testable implications of the Cournot model of market competition. Our approach is nonparametric in that we abstain from imposing any functional specification on market demand and firm cost functions. We derive necessary and sufficient conditions for (reduced form) equilibrium market price and quantity functions to be consistent with the Cournot model. In addition, we present identification results for the corresponding inverse market demand function and the firm cost functions. Finally, we use our approach to derive testable restrictions for the models of perfect competition, collusion and conjectural variations. This identifies the conditions under which these different models are empirically distinguishable from the Cournot model.

Deutsche Telekom and Pacific Bell v. Linkline: Does Competition Law Have a Place in Regulated Industries?

Posted by D. Daniel Sokol

Martin Holterman, University of Twente - School of Management and Governance asks Deutsche Telekom and Pacific Bell v. Linkline: Does Competition Law Have a Place in Regulated Industries?

ABSTRACT: This paper provides a positive and normative discussion of the role of competition law – and competition authorities – in fostering or hampering innovation in regulated industries, specifically the telecommunications industry. I combine an analysis of recent EU and American case law with a simple economic model of multi-agency regulation and its effects on innovation, as well as a discussion of the intentions of lawmakers when the current European regulatory system was last redesigned in 2002. While ideally the choices of lawmakers should reflect careful attention to the consequences of their decisions for innovation, the 2002 EU Telecommunications package appears to be highly problematic, in that it seems to give competition law a much greater role than my model would suggest is wise.

Announcing a New Feature for Competition Policy International - Corporate Counsel's Corner

Posted by D. Daniel Sokol

The excellent Competition Policy International (and if you do not subscribe, you really should) has rolled out a new feature.  On a regular basis, I will interview in-house competition counsel in a new program "Corporate Counsel Corner."  This will be a roughly 10 minute video program.  The first interview, with Steve Cernak of GM, is now up on the web and free here.  The next interview will be with Anne Riley of Shell.  If you are an in-house counsel and would like to be interviewed by me, please send me an email and we can set something up.

A summary of the interview is below:

CPI Executive Board member Danny Sokol introduces CPI's new Corporate Counsel Corner feature; a series of interviews in which he brings to the forefront the corporate viewpoint on dealing with antitrust issues.

We kick off with Steven Cernak. Steve Cernak is an attorney with the Marketing and Trade Regulation Section of the General Motors Corporation Legal Staff. He has practiced antitrust and trade regulation law for GM since 1989 and serves as lead competition law counsel for GM globally and lead counsel for GM’s Service Operations in the United States. Steve has managed GM’s responses to lemon law and breach of warranty lawsuits across the U.S. since 1999.

Danny and Steve first discuss the new merger guidelines and what changes, if any, these have produced in Steve's approach to filing and regulations.  They move on to explore the challenges of staying on top of the ever-increasing variety of international jurisdictional requirements; in particular, where outside counsel is required and how corporate counsel must now act as quarterbacks for a diverse team of internal and external lawyers and operating managers.

Taking the theme of sports a little further, Danny asks how corporate counsels should team with internal players who may not be familiar with antittrust issues, but need to be. Steve describes his educational process, which includes a novel game called "Compliance Land." Staying on internal matters, Steve also discusses some of the unique challenges that corporate counsels face, including the need to vet potential new members of the board of directors for conflicts of interest.

Danny and Steven then move on to discuss the challenges of communicating with "insider" lawyers and government officials when located in Detroit, or anywhere that isn't Washington, London, Brussels, or other administrative foci. As Steve points out, communication is a two-way street and regulators and lawyers need to come out of the beltway. Steve and Danny wrap up with a discussion of how antitrust activity seems to have migrated from a regulatory emphasis to a litigation emphasis.

Watch and enjoy:

Danny Sokol and Steve Cernak Interview

What If There Was a Stronger Pharmaceutical Price Competition in Spain? When Regulation Has a Similar Effect to Collusion

Posted by D. Daniel Sokol

Ivan Moreno-Torres, Universitat Pompeu Fabra - Faculty of Economic and Business Sciences asks What If There Was a Stronger Pharmaceutical Price Competition in Spain? When Regulation Has a Similar Effect to Collusion.

ABSTRACT: This paper examines statins competition in the Spanish pharmaceutical market, where prices are highly regulated, and simulates a situation in which there is unrestricted price competition. A nested logit demand model is estimated with a panel of monthly data for pharmaceuticals prescribed from 1997 to 2005. The simulation indicates that the regulation of prices is similar in its effects to cooperation among producers, since the regulated prices are close to those that would be observed in a scenario of perfect collusion. Freedom to set prices and a regulatory framework with appropriate incentives would result in a general reduction in prices and may make the current veiled competition in the form of discounts to pharmacists become more visible. The decrease in prices would be partially offset by an increase in consumption but the net effect would be an overall decrease in expenditure. The counterfactual set-up would also lead to important changes in the market shares of both manufacturers and active ingredients, and a reversal of generic drugs. Therefore, pro-competitive regulation would be welfareenhancing but would imply winners and losers.

A Survey of Legal Issues Regarding Fines Imposed in EU Competition Proceedings (2010)

Posted by D. Daniel Sokol

Eric Barbier de La Serre and Charlotte Winckler (both Latham & Watkins) describe A Survey of Legal Issues Regarding Fines Imposed in EU Competition Proceedings (2010).

ABSTRACT: During the last two years, the Commission has continued to impose very heavy fines on undertakings that have infringed Articles 81 or 82 EC (now Articles 101 and 102 TFEU). At the same time, the first decisions applying the 2006 Fining Guidelines show that the Commission is sometimes willing to adapt its general methodology to specific situations. For instance, while the Commission promotes a broad, and sometimes excessively broad, interpretation of the rules that allow it to find a single, continuous infringement, in several cases it has adopted a calibrated approach taking into account the lower probative value of the evidence on which it relied for certain periods of the infringement. The notion of ‘value of sales’, a key element in the calculation of fines, has more generally given rise to many adaptations. In 2008–2009, the Commission has also imposed several fines for infringements of rules other than Articles 101 and 102 TFEU, in particular for obstruction of an investigation (in this case the breach of a seal), non-compliance with a Commission decision, or gun-jumping. As to the EU Courts, in 2008–2009 they have indirectly confirmed the legality of Article 23(2) of Regulation No 1/2003 and ruled that the suspension of the running of the statute of limitations did not apply erga omnes. Some judgments have also given signs that the EU Courts' control of legality on certain elements of these fines would remain limited. This makes it even more crucial that the EU Courts exercise their unlimited jurisdiction proactively.

The Intersection of Antitrust and Intellectual Property: The Quest for Certainty in an Uncertain World

Posted by D. Daniel Sokol

Tom Rosch (FTC) gave a speech on The Intersection of Antitrust and Intellectual Property: The Quest for Certainty in an Uncertain World.

ABSTRACT: I am going to talk today about the quest for certainty in an uncertain world. I will focus on the current debate between Dan Wall and Amanda Reeves, on the one hand, and Tim Wu, on the other hand, as well as on three amicus briefs the Federal Trade Commission has filed or may be filing respecting the intersection between antitrust law and intellectual property law.