Antitrust & Competition Policy Blog

Direct Versus Communications-Based Prohibitions on Price Fixing

Posted by D. Daniel Sokol

Louis Kaplow, Harvard Law School, National Bureau of Economic Research (NBER) has posted the interesting Direct Versus Communications-Based Prohibitions on Price Fixing.

ABSTRACT: This article compares two policies toward coordinated oligopolistic price elevation. Most commentators endorse the view that the law should (and does) prohibit only those price elevations produced by certain sorts of interfirm communications, such as secret price negotiations. In contrast, little attention has been devoted to a more direct approach that encompasses all coordinated price elevations that can be detected and sanctioned effectively. It is demonstrated that the conventional formulation rests on numerous misconceptions, involves complex and costly detection if its logical implications are taken seriously, and tends to target cases with relatively low deterrence benefits and high chilling costs in contrast to those targeted under the direct approach.

DOJ to Challenge AT&T/T-Mobile

Posted by D. Daniel Sokol

The Department of Justice today filed a civil antitrust lawsuit to block AT&T Inc.’s proposed acquisition of T-Mobile USA Inc. The press release is here.

Remarks as Prepared for Delivery by Acting Assistant Attorney General Sharis A. Pozen at the AT&T/T-Mobile Press Conference.

Remarks as Prepared for Delivery by Deputy Attorney General James M. Cole at the AT&T/T-Mobile Press Conference

Implicit Collusion in Non-Exclusive Contracting under Adverse Selection

Posted by D. Daniel Sokol

Seungjin Han, McMaster University addresses Implicit Collusion in Non-Exclusive Contracting under Adverse Selection.

ABSTRACT: This paper studies how implicit collusion may take place in non-exclusive contracting under adverse selection when multiple agents (e.g., entrepreneurs with risky projects) non-exclusively trade with multiple firms (e.g., banks). It introduces the notion of the dual-additive price schedule, which makes agents non-exclusively trade with firms in the market without arbitrage opportunities. It then shows that any dual-additive price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through triggering trading mechanisms in which they change their terms of trade contingent only on agents' reports on the lowest average price that the deviating firm's trading mechanism would induce.

Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly

Posted by D. Daniel Sokol

Nicolas Le Pape (Universite du Mans) discuss Kai Zhao (Universite du Mans) explain Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly.

ABSTRACT: We consider firms perfectly symmetrical on production costs in the pre-merger game but the cost of the merged entity may be amended due to the anti-competitive effects of the merger. The lack of empirical precision concerning the effect of the merger on production costs (Scherer, 1980 or Tichy, 2002) justifies our theoretical model in which we do not specify a priori the exact production cost in the post merger game. Two firms in Stackelberg oligopoly game take part in the merger. The aim of this paper is to identify under which conditions on the cost the merger is privately profitable and socially desirable when firms in the coalition are either leaders or followers. We show that a merger could remain profitable even if the merged entity suffers from efficiency losses and we identify the condition on efficiency gains below which the merger takes place with the exclusion of all rivals. Among all possible cases, a profitable merger between two firms of different roles (leader & follower) could potentially give rise to more efficiency losses than the one encompassing firms of the same role. Moreover, profitable mergers can induce either an increase or a decrease in social welfare except for the case where two leaders decide to merge. Consequently this paper argues that Competition Authorities must supervise more closely two-firm mergers including either one or two followers.

Bankruptcy Risk, Product Market Competition and Horizontal Mergers

Posted by D. Daniel Sokol

Bernard Franck (Universite de Caen) and Nicolas Le Pape (Universite du Mans) discuss Bankruptcy Risk, Product Market Competition and Horizontal Mergers.

ABSTRACT: We consider an oligopolistic industry including leveraged …firms and unleveraged ones where …rms are engaged in a sequential decision-making process. At the fi…rst stage of the game, a …firm and her bank, considering the demand uncertainty and the distribution probability of the shock, evaluate a bankruptcy risk and, at the second stage, …firms are engaged in a Cournot competition. We characterize subgame perfect equilibria and we analyze the impact on these equilibria of the proportion of debt …nanced …firms in the industry. By introducing an additionnal upstream stage to the game, we then examine how debt …nancing impacts on incentives to merge with competitors. We demonstrate that a merger involving leveraged fi…rms increases the bankruptcy probability of the merging fi…rms while a similar merger concerning unleveraged …rms or between the two categories of …firms leads to a decrease in the bankruptcy probability of leveraged fi…rms. Moreover, the minimum number of …rms that must be engaged in the coalition in order to cause a pro…table merger, is lower in comparison with Salant, Switzer and Reynolds (1983). The welfare losses associated to anticompetitive e¤ects of mergers are lower when the coalition gathers unleveraged …rms rather than leveraged ones. Our model predicts that in evaluating proposed mergers Competition Authorities should take into account the …financial structure of both merging …firms and outsiders. Moreover the model justi…es the failing …rm argument when an unleveraged …firm takes over a leveraged one.

The Deterrence Effects of U.S. Merger Policy Instruments

Posted by D. Daniel Sokol

Joseph A. Clougherty, University of Illinois at Urbana-Champaign, Centre for Economic Policy Research (CEPR) and Jo Seldeslachts, University of Amsterdam, Tinbergen Institute have a new paper on The Deterrence Effects of U.S. Merger Policy Instruments.

ABSTRACT: We estimate the deterrence effects of U.S. merger policy instruments with respect to the composition and frequency of future merger notifications. Data from the Annual Reports by the U.S. DOJ and FTC allow industry based measures over the 1986-1999 period of the conditional probabilities for eliciting investigations, challenges, prohibitions, court-wins and court-losses: deterrence variables akin to the traditional conditional probabilities from the economics of crime literature. We find the challenge-rate to robustly deter future horizontal (both relative and absolute) merger activity; the investigation-rate to slightly deter relative horizontal merger activity; the court-loss-rate to moderately affect absolute-horizontal merger activity; and the prohibition-rate and court-win-rate to not significantly deter future horizontal mergers. Accordingly, the conditional probability of eliciting an antitrust challenge (i.e., remedies and prohibitions) involves the strongest deterrence effect from amongst the different merger policy instruments.

Right to Be Heard or Protection of the Confidential Information? Competing Guarantees of Procedural Fairness in the Proceedings Before the Competition Authority

Posted by D. Daniel Sokol

Maciej Bernatt, University of Warsaw, Jean Monnet Chair on European Economic Law / Centre of Antitrust and Regulatory Studies writes on Right to Be Heard or Protection of the Confidential Information? Competing Guarantees of Procedural Fairness in the Proceedings Before the Competition Authority.

ABSTRACT: The concept of procedural fairness plays an important role in the enforcement of competition law, which must not only be effective but also fair. Thus, legal institutions should guarantee a proper level of protection of the values of procedural fairness. This paper is dedicated to the possible conflict between the guarantees of procedural fairness that find their expression in the right to be heard and in the protection of confidential information. Both guarantees, the right to be heard on the one side, and the protection of confidential information on the other, should be properly balanced. Unlike EU law, Polish legislation and jurisprudence proves to be inefficient in this respect. Article 69 of the Competition Act fails to show clearly what the limits of the protection of confidential information are in situations when the right to be heard of other parties of antitrust proceedings is at stake. Business secrets are predominantly protected over the right to be heard also in the jurisprudence of Polish courts. By contrast, the Competition Act does not seem to properly protect confidential information other than business secrets. Such situation poses a risk for the adequate level of protection of procedural fairness in Polish antitrust enforcement. Moreover, neither Polish legislation nor jurisprudence explains to companies what shall prevail in the case of a concrete conflict between the protection of business secrets and the right to be heard. An answer to this questions is needed seeing as proof of a competition law infringement which should be accessible to the parties, can at the same time constitute a business secret.

The Lerner Index of Monopoly Power: Origins and Uses

Posted by D. Daniel Sokol

Kenneth G. Elzinga, University of Virginia - Department of Economics and David E. Mills, University of Virginia - Department of Economics have an interesting article on The Lerner Index of Monopoly Power: Origins and Uses.

ABSTRACT: Abba Lerner’s paper in the Review of Economic Studies (1934) is the source of what is now referred to as the Lerner Index of monopoly power. The Lerner Index has become the standard measure of monopoly power and one of the most widely cited indexes in the discipline of economics. This paper traces the origins of the index, sets out its strengths and weaknesses, and examines its role in antitrust enforcement. The Index is a better indicator of a firm’s price-setting discretion than its ability to sustain monopoly prices.

Wikileaks Finds that the US Government Lobbied Europe to Approve the Oracle/Sun merger

Posted by D. Daniel Sokol

According to the news story, Wikileaks has shed some light into the world of diplomacy and antitrust.  According to the story:

The cable noted that Oracle representatives were “unwilling or unable to make certain divestitures to satisfy the Commission's concerns” and that without the merger Sun would “go bankrupt.”

The cable suggests the US Government lobbied on behalf of Oracle to prevent Sun from shedding any further jobs and to save face for the US Department of Justice’s Antitrust division, which had approved the acquisition months earlier.

Looks Matter for Job Success - Do They in Antitrust?

Posted by D. Daniel Sokol

There was a NY Times op-ed yesterday by University of Texas econ Professor Daniel Hamermesh on the economics of ugly which suggests that ugly people get paid less over time relative to good looking people.  The author is the same econ prof who examined Michigan Law grads from the 60s to 80s and determined that the better looking ones ended up more successful in terms of financial earnings. 

Hamermesh also has found this effect of good looking people doing well among professors in the classroom.  

Hamermesh is the author of the recent book Beauty Pays (Princeton University Press 2011).  It is worth reading.

This makes me wonder about beauty in antitrust.  Do looks matter and if so at what stage of antitrust?  With case handlers? With getting clients? In court? Only for private sector people or for government people as well?  Does it make more of a difference for in-house people? Alternatively, is beauty more limited to "that is a beautiful brief" or "that is a beautiful economic model"?

Comments are welcome but please no anonymous comments.

 

Competition Enhancing Regulation and Diffusion of Innovation: The Case of Broadband Networks

Posted by D. Daniel Sokol

Harald Gruber, European Investment Bank and Pantelis Koutroumpis, Athens University of Economics and Business - Department of Management Science and Technology, European Union - European Investment Bank describe Competition Enhancing Regulation and Diffusion of Innovation: The Case of Broadband Networks.

ABSTRACT: The paper assesses the scope for competition inducing infrastructure regulation in furthering the diffusion of innovation. The paper uses data on the adoption of broadband services comprising a global panel of 167 countries. The effects of different regulatory provisions are assessed. Inter-firm competition in general and intra-platform competition on the incumbent’s DSL network in particular accelerate adoption of broadband, whereas there is little evidence that inter-platform over different access technologies and intra-platform competition on cable have such effects. Retail competition has about a twice as strong effect than local loop unbundling in furthering diffusion. The effect deriving from service competition is more powerful than the effect of provisions that induce competitors in investing. The diffusion enhancing effect from regulatory access provisions however dissipates after 3-4 years. These results are robust under different hypotheses of reverse causality and taking into account regulatory metrics and variable endogeneity.

The Antitrust Curse of Bigness

Posted by D. Daniel Sokol

Barak Orbach University of Arizona and Grace E. Campbell University of Arizona - James E. Rogers College of Law discuss The Antitrust Curse of Bigness.

ABSTRACT: In 1882 Standard Oil’s General Solicitor invented the corporate trusts that inspired the birth of the anti-trust discipline. The public aversion to trusts in the United States gave the field its enduring and uniquely American name. As the discipline matured, distrust of bigness took root in cases and doctrines. Justices Louis Brandeis and William Douglas wrote the narrative into early case law and it remained embedded in the field even as economics became the antitrust methodology—although economics transformed the fear from absolute size to relative size (market shares). While size should be an irrelevant consideration in antitrust analysis, it still mistakenly serves as a driving force behind the law. This Article studies how the fear of bigness—of absolute or relative size—has shaped and confused analytical perceptions of antitrust law. The American discipline might owe its birth to the fear of size, but this fear has been a burden and a curse on the development of sound antitrust policies.

Monopoly and Regulation in Industrializing England: Evidence from the Infrastructure Sector

Posted by D. Daniel Sokol

Daniel E. Bogart, University of California, Irvine - Department of Economics addresses Monopoly and Regulation in Industrializing England: Evidence from the Infrastructure Sector.

ABSTRACT: The infrastructure sector poses a challenge to the view that England had open and competitive markets during its industrializing era. The British national government granted thousands of monopolies with rights to levy tolls on internal trade in the 1700s and early 1800s. This paper shows, however, that most monopoly infrastructure providers did not earn monopoly profits. Using turnpike and river navigation investments as test cases, it demonstrates that rates of return were between 3 and 5%, below the competitive rate of return. The paper also offers evidence that profits were low in part because of competition between providers. Rates of return are shown to be lower in counties with lower Herfindahl indices. The strength of competition is linked with a regulatory framework that imposed low barriers to entry in the infrastructure sector.

Patent Misuse and Antitrust: An Empirical Study

Posted by D. Daniel Sokol

Daryl Lim, The John Marshall Law School has written Patent Misuse and Antitrust: An Empirical Study.

ABSTRACT: This empirical study seeks to present a systematic, comprehensive account of the recent history of patent misuse case law, its actual state and its relationship with antitrust law. The study is based on the use of case content analysis complemented by interviews. The findings present an analysis of how federal judges who employed patent misuse did so, and how patent misuse is current perceived by contemporary judges, academics, government officials, and lawyers.

Conventional legal doctrine derives from a small set of cases selected by case reporters and academics. This study will determine whether that conventional wisdom in fact has empirical support. It highlights key aspects of patent misuse, including the way it has been interwoven with antitrust principles. The study is based on the use of case content analysis complemented by interviews. The findings present an empirical analysis of how federal judges who employed patent misuse did so, and how patent misuse is current perceived by contemporary judges, academics, government officials, and lawyers. It also provides an indication of whether more in-depth research is required to unravel the nature and extent of the interaction between patent misuse and antitrust. This study does not set out to analyze case law. Cases are relevant only to the extent that they stated a policy position, or featured as a variable in the study, or example as a precedent, whose citation which could be quantified.

The study begins by setting the stage. It presents relevant facets of data on patent misuse to provide an appreciation of the issues that follow. It explains how cases are distributed, for example by circuit, posture and industry. It also presents the outcomes of cases which have considered patent misuse without reference to antitrust, or both patent misuse and antitrust, in preparation for the discussion on the relationships between them that follows. Finally, it presents the rich and diverse categories of misuse which have appeared over the years.

The second part of the study focuses on the intersection of patent misuse and antitrust law. It begins by examining what factors go into determining when patentees exceed the scope of their rights. Specifically, it attempts to deconstruct the analytical process judges employ, and articulate the policies driving patent misuse that have been obscured by rhetoric in the opinions. The second part then proceeds to offer reasons for the contraction of patent misuse over the years. In particular, it examines the effect the Patent Misuse Reform Act of 1988 and federal appellate jurisprudence on re-delineating the scope of patent misuse. The final part concludes with observations on relevant areas suitable for the application of a reinvigorated patent misuse doctrine. In this regard, the relevant literature, as well as courts and commentators, point to licensing misconduct involving standard setting organizations and settlements between owners of patented drugs and generic drug companies as examples where patent misuse may meaningfully contribute. In addition, patent misuse has also been identified as providing an important foundation for derivative doctrines, such as copyright misuse, to take root and flourish.

The study juxtaposes language from judicial opinions with statistics and insights from interviewees where appropriate. The significant question for this paper is not which view of patent misuse is best. Rather the focus is on determining the scope of patent misuse according to court opinions and perceptions in practice.

Competition in Health Care Markets

Posted D. Daniel Sokol

Martin S. Gaynor, Carnegie Mellon University has posted Competition in Health Care Markets.

ABSTRACT: This paper reviews the literature devoted to studying markets for health care services and health insurance. There has been tremendous growth and progress in this field. A tremendous amount of new research has been done in this area over the last 10 years. In addition, there has been increasing development and use of frontier industrial organization methods. We begin by examining research on the determinants of market structure, considering both static and dynamic models. We then model the strategic determination of prices between health insurers and providers where insurers market their products to consumers based, in part, on the quality and breadth of their provider network. We then review the large empirical literature on the strategic determination of hospital prices through the lens of this model. Variation in the quality of health care clearly can have large welfare consequences. We therefore also describe the theoretical and empirical literature on the impact of market structure on quality of health care. The paper then moves on to consider competition in health insurance markets and physician services markets. We conclude by considering vertical restraints and monopsony power.

A theoretical model of collusion and regulation in an electricity spot market

Posted by D. Daniel Sokol

Diego Escobari, The University of Texas - Pan American provides A theoretical model of collusion and regulation in an electricity spot market.

ABSTRACT: This paper presents a theoretical model of collusion and regulation in a wholesale electricity spot market. Given a demand for electricity, competing generators report their marginal costs. Then, only generators with the lowest marginal costs are selected to sell at a price equal to the marginal costs of the last generator selected to sell. The results show that under a fixed price level it is a weakly dominant strategy to truthfully report the marginal cost. Variable (or endogenous) prices create the possibility of profitable collusion among generators. With uncertainty in the marginal costs and risk neutrality, the results show that a necessary condition for collusion to be sustainable is that the marginal cost reported by the pivot (marginal generator) should be higher than the average of the true marginal costs of all the generators. The existence of collusion fines and audit probabilities were found to be effective in deterring collusion. It is also shown that more efficient generators have less incentive to collude.

Modern food retailers and traditional markets in developing countries: Comparing quality, prices, and competition strategies in Thailand

Posted by D. Daniel Sokol

Christin Schipmann (International Crops Research Institute for the Semi-Arid Tropics) and Matin Qaim (Department of Agricultural Economics and Rural Development, Georg-August-University of Goettingen) discuss Modern food retailers and traditional markets in developing countries: Comparing quality, prices, and competition strategies in Thailand.

ABSTRACT: Supermarkets and hypermarkets are expanding rapidly in many developing countries. While consequences for farmers and consumers were analyzed recently, little is known about the implications for traditional retail formats such as wet markets. Using data from a market survey in Thailand and hedonic regression models, we analyze quality and prices for fresh vegetables from different retail outlets. Compared to wet markets, modern retailers sell higher quality at higher prices, indicating that they are primarily targeting better-off consumers. Hence, they are not directly competing for the same market

Sports Business and Multisided Markets: Towards a New Analytical Framework?

Posted by D. Daniel Sokol

Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark) and Janina Satzer (Department of Environmental and Business Economics, University of Southern Denmark) describe Sports Business and Multisided Markets: Towards a New Analytical Framework?

ABSTRACT: Despite still being younger than a decade, the theory of multisided markets has offered numerous valuable insights for the analysis of industries in which a supplier serves two distinct customer groups that are indirectly interrelated through externalities. Examples include payment systems, matching agencies, commercial media, and software platforms. However, professional sports mar-kets have largely been neglected so far in this kind of research although they possess the characteristics of multisided markets. This conceptual paper con-tributes to filling this gap by describing the platform elements of professional suppliers of sports events and conceptually outlining issues where an applica-tion of this theoretical framework is likely to provide valuable insights and to add to the existing knowledge. Among these problems are integrative pricing strategies of sports clubs towards such different customer groups like atten! dees, broadcasters, sponsors, etc., including their welfare and antitrust implications, design decisions of sports associations in order to promote positive feedback loops among the customer groups as well as management strategies to reinforce positive externalities among customer groups and alleviate negative ones.

Recent Developments in European Bank Competition

Posted by D. Daniel Sokol

Yu Sun (IMF) writes on Recent Developments in European Bank Competition.

ABSTRACT: This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any impact on bank competition. The results suggest that the level of bank competition converged across euro area countries in the wake of the EMU. The recent global financial crisis led to a fall in competition in several countries and especially where large credit and housing booms had preceded the crisis.

Does Europe have an innovation policy? The case of EU economic law

Posted by D. Daniel Sokol

Lauren Battaglia , Pierre Larouche , Matteo Negrinotti ask Does Europe have an innovation policy? The case of EU economic law.

ABSTRACT: This paper is the first of a larger project aimed at exploring, among other things, whether Europe has a consistent innovation policy in the context of EU economic law (competition policy, intellectual property law, sector regulation). As such, its primary aim is to present our approach for answering this question and outline the anticipated contributions of the project. Part I of the paper sets forth the theoretical foundations of the project--namely an integrated approach to economic law that moves beyond apparent conflicts and assumes innovation as the starting point. Taking this as the foundation, the two primary components of the project are described. First, a theoretical component involving the development of an analytical grid to be used to identify ways in which economic law impacts innovation, and second an applied component that explores observable instances where choices, both implicit and explicit, are made regarding innovation in economic law. Part II of the paper builds on this and offers a preliminary illustration of the proposed analysis in the context of pharmaceuticals, specifically drug reformulation regulatory gaming.