Antitrust & Competition Policy Blog

Firm's damages from antitrust & abuse of dominant position investigations

Posted by D. Daniel Sokol

Panagiotis N. Fotis (Hellenic Competition Commission) addresses Firm's damages from antitrust & abuse of dominant position investigations.

ABSTRACT: Competition authorities carry out investigations and impose legal penalties on firms which are caught infringing the competition law. The rationale of this policy is to prevent firms from distorting free competition in a way that is detrimental to economic efficiency and at the same time to deter them from engaging in cartels and other anti-competitive behaviour. In this paper I try to evaluate the impact of major antitrust & abuse of dominant position investigations on firm’s financial value. For this purpose I divide the period of each investigation into two sub periods: the ‘Investigation period”, which begins from the outset of the anticompetitive case and ends when the competition authority issues the statement of objections to the infringed firms and the ‘Deterrence period’, which follows the ‘Investigation period’ and ends with the final judgment of the court. I use aggregate regression based app! roach to estimate the Average & Cumulative Average Residuals of the firms which infringe articles 1 & 2 of Greek Competition Law. The empirical results imply that the release of the final decisions of the Hellenic Competition Commission and the Court of Appeal negatively affect the share price of the infringed firms.

Hidden Information, Bargaining Power, And Efficiency: An Experiment

Posted by D. Daniel Sokol

Antonio Cabrales (Departamento de Economía - Universidad Carlos III de Madrid), Gary Charness (Department of Economics, University of California - University of California, Santa Barbara) and Marie-Claire Villeval (GATE Lyon Saint-Etienne describe Hidden Information, Bargaining Power, And Efficiency: An Experiment.

ABSTRACT: We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents' informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more 'generous' (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.

Sales and Collusion in a Market with Storage

Posted by D. Daniel Sokol

Francesco Nava (LSE) and Pasquale Schiraldi (LSE) address Sales and Collusion in a Market with Storage.

ABSTRACT: Sales are a widespread and well-known phenomenon that has been documented in several product markets. Regularities in such periodic price reductions appear to suggest that the phenomenon cannot be entirely attributed to random variations in supply, demand, or the aggregate price level. Certain sales are traditional and so well publicized that it is difficult to justify them as devices to separate informed from uninformed consumers. This paper presents a model in which sellers want to reduce prices periodically in order to improve their ability to collude over time. In particular, the study shows that if buyers have heterogeneous storage technologies, periodic sales may facilitate collusion by magnifying intertemporal linking in consumers' decisions. The stability and the profitability of different sale strategies is then explored. The optimal sales discount and timing of sales are characterized. A trade-off between carte! l size and aggregate profits arises.

Market Share Exclusion

Posted by D. Daniel Sokol

Mikko Packalen (Department of Economics, University of Waterloo) has posted on Market Share Exclusion.

ABSTRACT: A market share exclusion contract between a seller and a buyer prevents rival sellers from competing for a share of the buyer's purchases. For non-discriminatory contracting we show that, unlike exclusion through exclusive dealing, market share exclusion can be profitable even when buyers coordinate on the best equilibrium in the contract-acceptance subgame. The condition for the profitability of market share exclusion is characterized in terms of straightforward economic concepts. With discriminatory contracting market share exclusion contracts are generally less profitable than exclusive dealing contracts. The motive for employing market share exclusion contracts, which welfare impacts have not been well understood, instead of exclusive dealing contracts, which have been the focus of both theory and policy, may thus often be the avoidance of scrutiny by competition authorities rather than some more direct economic adva! ntage of market share exclusion over exclusive dealing. However, we also show that market share exclusion decreases both buyer and total surplus. Hence, competition authorities should not view exclusion through exclusive dealing as a pre-requisite for the possibility of anti-competitive effects from exclusionary contracting.

Cartel Ringleaders and the Corporate Leniency Program

Posted by D. Daniel Sokol

Iwan Bos, University of Amsterdam - Amsterdam Center for Law & Economics and Amsterdam Business School Frederick Wandschneider, University of East Anglia (UEA) - Centre for Competition Policy, University of East Anglia (UEA) - School of Economic and Social Studies, University of East Anglia (UEA) - Centre for Behavioural and Experimental Social Science (CBESS) have an interesting paper on Cartel Ringleaders and the Corporate Leniency Program.

ABSTRACT: Cartel ringleaders can apply for amnesty in some jurisdictions (e.g., the E.U.), whereas in others they are excluded (e.g., the U.S.). This paper provides a survey of identified ringleaders in recent European cartel cases and explores theoretically the effect of ringleader exclusion on collusive prices. Our survey shows that cartels often had more than one ringleader, the role of ringleaders was very diverse and ringleaders were typically the largest cartel members. Our theoretical analysis reveals that ringleader exclusion leads to higher prices when the joint profit maximum cannot be sustained under a non-discriminatory leniency policy, antitrust fines depend on individual cartel gains in a nonlinear fashion and the size distribution of members is sufficiently heterogeneous. These findings support the imposition of antitrust penalties proportional to firm size when ringleaders are excluded from the corporate leniency program.

Tying Law in Microsoft I and II: The Secret Art of Magic?

Posted by D. Daniel Sokol

Nicolas Petit, University of Liege and Norman Neyrinck, University of Liege ask Tying Law in Microsoft I and II: The Secret Art of Magic?

ABSTRACT: This paper seeks to uncover an inconvenient truth. The Microsoft decisions are not tying cases. Rather, the two decisions taken by the EU Commission against Microsoft – i.e. the Windows Media Player (“WMP”) case of 2004 and the Internet Explorer (“IE”) case of 2009 – mark departures from conventional tying analysis (I). First, they deviate from standard tying law in that in the Microsoft cases, a key component of abusive tying, namely coercion, is missing (II). Second, the Microsoft decisions share many analogies with “essential facility” cases. One may thus question to what extent the Commission has not pursued disguised refusal to supply cases (III).

To Surcharge or Not to Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule

Posted by D. Daniel Sokol

Nicholas Economides, Leonard N. Stern School of Business - Department of Economics and David Henriques, New York University - Leonard N. Stern School of Business, NOVA School of Business and Economics ask To Surcharge or Not to Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule.

ABSTRACT: In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants' market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets.

Credit Rating Agencies, the Sovereign Debt Crisis and Competition Law

Posted by D. Daniel Sokol Nicolas Petit, University of Liege explores Credit Rating Agencies, the Sovereign Debt Crisis and Competition Law. ABSTRACT: This paper explores the possibility of remedial intervention against the credit rating oligopoly under the competition rules. To this end, it is divided in six parts. Following an introduction, Part II provides an overview of the credit ratings industry. Part III demonstrates that there is a possible economic case for antitrust intervention against the CRAs. Part IV examines the doctrines of competition law that could be applied against CRAs. Part V reviews possible remedies. Part VI provides a conclusion. The analysis is conducted on the basis of European Union competition law. Subject to national legal idiosyncrasies, it applies mutatis mutandis to other competition law regimes.

Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts

Posted by D. Daniel Sokol

Anne Layne-Farrar, Compass Lexecon, Gerard Llobet, Centre for Monetary and Financial Studies (CEMFI) and Atilano Jorge Padilla Blanco, Compass Lexecon analyze Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts.

ABSTRACT: This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the "Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.

THE 2010 MERGER GUIDELINES, CRITICAL LOSS, AND LINEAR DEMAND

Posted by D. Daniel Sokol

Jay Ezrielev (Compass Lexicon) and Joseph J. Simons (Paul Weiss) describe THE 2010 MERGER GUIDELINES, CRITICAL LOSS, AND LINEAR DEMAND.

ABSTRACT: Critical Loss Analysis (CLA) is a widely used tool for market definition under the hypothetical monopolist test. The 2010 Horizontal Merger Guidelines appear to refer to a specific version of CLA that assumes that (1) pre-merger pricing satisfies the Lerner Condition; and (2) products' demand functions are linear in price in the vicinity of the pre-merger equilibrium point. We show that under general conditions, the linear demand assumption is not satisfied and can lead to significant errors in the application of the hypothetical monopolist test. We develop a model of differentiated products competition that shows that under reasonable assumptions, products' demand functions are concave around the pre-merger equilibrium point. The concavity of the demand curve appears to be related to clustering of consumers around products in the differentiated product space. When such clustering occurs, the model suggests that demand will tend to have a concave shape around the pre-merger equilibrium point.

Shana Tova

Posted by D. Daniel Sokol

Tonight begins Rosh Hashana, the Jewish new year.  I wish all the readers of the blog a happy and healthy new year.  I also want to give advance notice that I am setting up a CLE with the ABA Antitrust Section's Exemptions and Immunities Committee on Antitrust and Judaism.  We will discuss barriers to entry, Rabbi cartels and other topics.  It should be fun.

Structure, Conduct and Performance in the South African Potato Processing Industry

Posted by D. Daniel Sokol

J.W. Hanekom, B.J. Willemse and D.B. Strydom (all University of Free State South Africa) address Structure, Conduct and Performance in the South African Potato Processing Industry.

ABSTRACT: The South African Potato industry was deregulated in the early 1990’s, leading to changes in market structure. The adjustment in market structure leads to changes in production and marketing practices, including contracting and pricing strategies for processing firms within the industry. The purpose of this paper is to investigate the current status in the potato processing industry, based on market structure, conduct and performance. The objective is to qualitatively measure the driving forces within the industry, and how these factors influence performance of the industry as a whole. The research method was based on the structure-conduct-performance paradigm, giving a better understanding of the potato processing industry and the driving forces, relating to future growth. A short case study of the Australian potato processing industry, which finds itself in a similar position as South Africa, reveals that increasing global competition in the form of low cost importers, are hampering competitiveness and profitability, along with rising production costs. It was found that the South African potato processing industry has a relatively high concentration, which means efficiency is lacking as market shares is not distributed effectively. It was further evident that a lack of trust between processors and producers is a source of concern for processors.

Call for Papers: Antitrust and Economic Crises

Posted by D. Daniel Sokol

The Italian annual journal "Concorrenza e Mercato" (Giuffrè ed.), whose 2011 issue has just been released (https://shop.giuffre.it/it-IT/products/224161.html), invites submissions for publication in the journal's coming issue (2012). Contributions should reflect on "Antitrust and Economic Crises" in a legal or economic perspective. We kindly remind you that completed papers should be submitted by December 31, 2011. The journal also welcomes (by the same date) contributions on compeition law and economics reflecting on issues others than that of the call for papers.

Is the Service Quality of Private Roads too Low, too High, or just Right when Firms compete Stackelberg in Capacity?

Posted by D. Daniel Sokol

Vincent A.C. van den Berg (VU University Amsterdam) and Erik T. Verhoef (VU University Amsterdam) asks Is the Service Quality of Private Roads too Low, too High, or just Right when Firms compete Stackelberg in Capacity?

ABSTRACT: We study road supply by competing firms between a single origin and destination. In previous studies, firms simultaneously set their tolls and capacities while taking the actions of the others as given in a Nash fashion. Then, under some widely used technical assumptions, firms set a volume/capacity ratio that is socially optimal, and thus the level of travel time or service quality is socially optimal. We find that this result does not hold if capacity and toll setting take place in separate stages, as then firms want to limit the toll competition by setting lower capacities; or when firms set capacities one after another in a Stackelberg fashion, as then firms want to limit their competitors' capacities by setting higher capacities. In our Stackelberg competition, the firms that act last have few if any capacity decisions to influence. Hence, they are more concerned with the toll-competition substage, and set a higher ! volume/capacity ratio than sociall y optimal. The firms that act first care more about their competitors' capacities that they can influence: they set a lower volume/capacity ratio. So the first firms to enter have a too short travel time from a social perspective, and the last firms a too long travel time. The average private travel time is shorter than socially optimal. Still, in our numerical model, for three or more firms, welfare is higher under Stackelberg competition than under Nash competition, because of the larger total capacity and lower tolls.

Entry deterrence in banking: the role of cost asymmetry and adverse selection

Posted by D. Daniel Sokol

Indrajit Mallick, Centre for Studies in Social Sciences and Kolkata Hamid Beladi University of Texas at San Antonio discuss Entry deterrence in banking: the role of cost asymmetry and adverse selection.

ABSTRACT: In this paper, we review and explore the strategic mechanisms that deter entry in banking. The literature relies on externality between banks to generate entry deterrence. Typically, the externality generated is caused by differential adverse selection faced by incumbents and entrants. In this paper it is shown that adverse selection problem between a bank and its borrowers is neither a necessary nor a sufficient condition for entry deterrence. We show that cost asymmetry between different types of incumbents and private information about costs can generate conditional entry deterrence. This source of externality can cause entry deterrence just as other types of externalities created by differential adverse selection. Forward contracts can act as signaling device for incumbent costs. Incorporating adverse selection problem in the credit market in fact relaxes entry conditions: entry can take place even if the in! cumbent is of strong type and can signal credibly.

Can Naked Exclusion Be Procompetitive?

Posted by D. Daniel Sokol

Linda Gratz, International Max-Planck Research School for Competition and Innovation (IMPRS-CI), Ludwig Maximilians University of Munich - Munich Graduate School of Economics (MGSE) and Markus Reisinger, WHU - Otto Beisheim Graduate School of Management, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ask Can Naked Exclusion Be Procompetitive?

ABSTRACT: Antitrust scholars have argued that exclusive contracts have anticompetitive, or at best neutral effects, if no efficiencies are generated. In contrast, this paper shows that exclusive contracts can have procompetitive effects, provided buyers are imperfect downstream competitors and contract breach is feasible. In that case an efficient entrant is not necessarily foreclosed through exclusive contracting but induces buyers to breach. Because breaching buyers have to pay expectation damages to the incumbent, the downstream profits they obtain when breaching must be large enough. Therefore, the entrant needs to set a lower wholesale price than absent exclusive contracting, leading to lower final consumer prices and higher welfare.

The Construction of a Low Cost Airline Network

Posted by D. Daniel Sokol

Kathrin Mueller, Centre for European Economic Research (ZEW), Volodymyr Bilotkach, University of California, Irvine - Department of Economics, and Kai Huschelrath, Centre for European Economic Research (ZEW) discuss The Construction of a Low Cost Airline Network.

ABSTRACT: The paper investigates the construction of a low cost airline network by analyzing JetBlue Airways' entry decisions into nonstop domestic U.S. airport - pair markets between 2000 and 2009. Adopting duration models with time-varying covariates, we find that JetBlue consistently avoided concentrated airports and targeted concentrated routes; network economies also affected entry positively. For non-stop entry into a route that has not been served on a non-stop basis before, our analysis reveals that the carrier focused on thicker routes and secondary airports, thereby avoiding direct confrontation with network carriers. Non-stop entry into existing non-stop markets, however, shows that JetBlue concentrated on longer-haul markets and avoided routes already operated by either other low cost carriers or network carriers under bankruptcy protection.

Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities

Posted by D. Daniel Sokol

Marco Alderighi (Universita della Valle d'Aosta, Aosta, Italy; Universita Bocconi, Italy)
Alessandra Cento (KLM Royal Dutch Airlines, Milano, Italy), Peter Nijkamp (VU University Amsterdam), and Piet Rietveld (VU University Amsterdam) explore Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities.

ABSTRACT: This paper presents a model of second-degree price discrimination and inter-group effects to describe the full-service pricing behaviour in the passenger aviation market. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. In the theoretical model framework, we derive that the rivalry between full-service carriers (FSCs) reduces fare differences between the business and leisure segments. Furthermore, the presence of LCCs increases fare gaps between leisure and business travellers, and it also induces FSCs to decrease fares in the leisure segment and eventually to increase them in the business one. This last outcome emerges from a change in passenger arrangements caused by inter-group effects. In our empirical analysis, we use data on published airfares of Lufthansa, British Airways, KLM and Alitalia for the main city-pairs from Italy to Germany, the UK and the Netherlands. Our results show that the empirical results provide support for our theoretical propositions.

The Distribution of the Size of Price Changes

Posted by D. Daniel Sokol

Alberto Cavallo (MIT Sloan) and Roberto Rigobon (MIT Sloan) analyze The Distribution of the Size of Price Changes.

ABSTRACT: Different theories of price stickiness have distinct implications on the number of modes in the distribution of price changes. We formally test for the number of modes in the price change distribution of 36 supermarkets, spanning 22 countries and 5 continents. We present results for three modality tests: the two best-known tests in the statistical literature, Hartigan's Dip and Silverman's Bandwidth, and a test designed in this paper, called the Proportional Mass test (PM). Three main results are uncovered. First, when the traditional tests are used, unimodality is rejected in about 90 percent of the retailers. When we used the PM test, which reduces the impact of smaller modes in the distribution and can be applied to test for modality around zero percent, we still reject unimodality in two thirds of the supermarkets. Second, category-level heterogeneity can account for about half of the PM test's rejections of unimodal! ity. Finally, a simulation of the model in Alvarez, Lippi, and Paciello (2010) shows that the data is consistent a combination of both time and state-dependent pricing behaviors.

‘Lead, Follow or Cooperate’: Endogenous Timing & Cooperation in Symmetric Duopoly Games

Posted by D. Daniel Sokol

Marco Marini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and CREI, Università di Roma III) and Giorgio Rodano (Dipartimento di Informatica e Sistemistica "Antonio Ruberti", Università di Roma "La Sapienza") discuss ‘Lead, Follow or Cooperate’: Endogenous Timing & Cooperation in Symmetric Duopoly Games.

ABSTRACT: The aim of this paper is to extend Hamilton and Slutsky's (1990) endogenous timing game by including the possibility for players to cooperate. At an initial stage players are assumed to announce both their purpose to play early or late a given duopoly game as well as their intention to cooperate or not with their rival. The cooperation and timing formation rule is rather simple: when both players agree to cooperate and play with a given timing, they end up playing their actions coordinately and simultaneously. Otherwise, they play as singletons with the timing as prescribed by their own announcement. We check for the existence of a subgame perfect Nash equilibrium (in pure strategies) of such a cooperation-timing duopoly game. Two main results on the emergence of cooperation are provided. If players' actions in the symmetric duopoly game are strategic substitutes and there is no discount, cooperating early (as a grand co! alition) is a subgame perfect equilibrium of the extended timing-cooperation game. Conversely, cooperating late (at period two) represents an equilibrium when playersstrategies are strategic complements. Other equilibria are also possible. Most importantly, our model shows that, in general, the success of cooperation is a¤ected by the endogenous timing of the game. Moreover, the slope of players' best-replies appears crucial both for the success of cooperation as well as for the players' choice of sequencing their market actions.