Antitrust & Competition Policy Blog

Bertrand competition in markets with network effects and switching costs

Posted by D. Daniel Sokol

Irina Suleymanova and Christian Wey (both Dusseldorf Institute for Competition Economics) describe Bertrand competition in markets with network effects and switching costs.

ABSTRACT: We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how comp! etition depends on agents' discount factors.

Job Posting for OFT: Assistant Legal Directors – Competition Law and Policy

Posted by D. Daniel Sokol

Assistant Legal Directors – Competition Law and Policy

Salary : £61,500 (total salary package including lawyer premium)

The Office of Fair Trading is the UK's consumer and competition authority, with a mission to make markets work well for consumers. Each year we deliver substantial benefits to consumers, businesses and the wider UK economy. We are an ambitious world-class organisation, intent on using our competition and consumer tools to ensure businesses operate in a fair and competitive way. We are looking for talented high performers for the General Counsel's Office and Competition Policy team to take responsibility for leading legal or competition policy work on investigations, projects and studies, focusing on some of the most significant, novel and technically complex competition law issues. As one of our senior lawyers you'll advise on legal and policy aspects of high-profile competition law cases, litigation and projects and on public law. A solicitor or barrister qualified to practise in England and Wales, you will have an excellent working knowledge of competition law and preferably public law, including human rights issues and judicial review claims. You'll also need to demonstrate high academic ability together with strong oral and written presentation skills. You will be a strategic thinker and a highly analytical individual who can develop innovative solutions, equipped with strong project and people management skills.

For more information on this role, please refer to the full job description and person specification (pdf 178kb).

How to apply

To apply please send a CV and covering letter explaining how you meet the requirements of the role to [email protected]. Please quote reference number OFT920 stating where you saw the role advertised. Also, please complete and submit a diversity monitoring form (Word 147kb).

Closing date: 19 October 2011 The Office of Fair Trading is an equal opportunities employer.

Contact details: email: [email protected]

Almunia on Collective Redress

Posted by D. Daniel Sokol

Joaquin Almunia Vice President of the European Commission responsible for Competition Policy has given a speech outlining Collective Redress.

The Problem of Measuring Legal Change, with Application to Bell Atlantic v. Twombly

Posted by D. Daniel Sokol

William Hubbard, U. Chicago Law has posted an interesting paper on The Problem of Measuring Legal Change, with Application to Bell Atlantic v. Twombly.

ABSTRACT: Measuring legal change - i.e., change in the way that judges decide cases - presents a vexing problem. In response to a change in the behavior of courts, plaintiffs and defendants will change their patterns of filing and settling cases. Priest and Klein's (1984) selection model predicts that no matter how favorable or unfavorable the legal standard is to plaintiffs, the rate at which plaintiffs prevail in litigation will not predictably change; thus, legal change cannot be measured with data on court outcomes. In this paper, I extend the selection model to develop a methodology for measuring legal change, even in the presence of selection effects. I apply this methodology to a recent, high profile Supreme Court case, Bell Atlantic Corp. v. Twombly. My model generates novel predictions, which are confirmed in the data, and I find that Twombly caused no legal change, even after accounting for possible selection effects.

Wal-Mart Stores, Inc. v. Dukes: Supreme Court Clarifies Commonality Analysis for Class Actions and Rejects Use of Injunctive Relief as Hook to Certify Damages Class

Posted by D. Daniel Sokol

Donald Falk, Archis Parasharami, & Marcia Goodman (Mayer Brown) have written on Wal-Mart Stores, Inc. v. Dukes: Supreme Court Clarifies Commonality Analysis for Class Actions and Rejects Use of Injunctive Relief as Hook to Certify Damages Class.

ABSTRACT: Last year we reported on the en banc Ninth Circuit's pathbreakingly broad decision affirming the certification of a class of 1.5 million plaintiffs in a lawsuit alleging that Wal-Mart had discriminated against its female employees at all levels. At that time, we noted that the court of appeals had lowered the bar to class certification in several important respects, creating or deepening at least three conflicts among the circuits that might draw the attention of the Supreme Court.

The effects of the Ninth Circuit's decision were short-lived; the Supreme Court granted certiorari and reversed in Wal-Mart Stores, Inc. v. Dukes. The Court unanimously concluded that the Ninth Circuit had gone too far in approving certification under Federal Rule of Civil Procedure 23(b)(2). Rejecting the Ninth Circuit's use of that Rule as a less-demanding basis to certify a 1.5-million-member class of individuals seeking individual monetary awards, the Court restored Rule 23(b)(2) to its traditional limits as a means for permitting a class to seek a common injunction or declaration.

In addition, the Court (over dissent) provided its first comprehensive and coherent definition of what it means for a question to be "common" under Rule 23(a)(2). That holding will influence the analysis of damages classes that can be certified only by satisfying Rule 23(b)(3) with proof that common questions predominate over individual ones. Only questions that are "common" under Rule 23(a)(2) count in the predominance analysis under Rule 23(b)(3).

Both aspects of the Supreme Court's decision in Dukes are likely to affect certification of antitrust class actions (and, thus, the incentives for defendants to settle cases of questionable merit). The Court's Rule 23(b)(2) holding removes a potential avenue to certify classes for both injunctive and pecuniary relief based on a single-factor analysis that addresses only the allegedly unlawful practice rather than its differing (and sometimes absent) effects on each individual class member.

More significant may be the Court's clarification that commonality under Rule 23(a)(2) does not encompass every abstract theory or general factual similarity, but involves important issues that can be resolved for all class members in a single stroke. The Court's skeptical reaction to the Dukes plaintiffs' use of expert testimony to avoid individualized issues also may have particular significance in antitrust class certification proceedings. While the Ninth Circuit's superseded decision had provided unusually broad support to plaintiffs seeking class certification, the Supreme Court's decision sets relatively clear limits on aspects of class certification that had become indistinct and thus improperly permissive.

Monopoly versus Competitive Leveraging of Reputation through Umbrella Pricing

Posted by D. Daniel Sokol

Eric Bennett Rasmusen, Indiana University Bloomington - Department of Business Economics & Public Policy has posted Monopoly versus Competitive Leveraging of Reputation through Umbrella Pricing.

ABSTRACT: The Klein-Leffler model explains how the benefit of future reputation can induce firms to produce high quality experience goods, either in a monopoly or an industry with competing firms. We show that reputation can be leveraged across products, but only by a firm with a monopoly on at least one product. Such a firm, however, may be able to capture the market for a competitive product by using umbrella pricing to make higher quality more credible than for firms without a monopoly base. Such monopoly extension increases social welfare, and can even benefit consumers, despite the increase in price. The expanding monopolist does not need to use bundling, and consumers are left better off, but otherwise this looks like classic monopoly leverage.

Leveraging Monopoly Power by Degrading Interoperability: Theory and evidence from computer markets

Posted by D. Daniel Sokol

Christos D. Genakos (Cambridge), Kai-Uwe Kuhn (Michigan) and John Van Reenen (LSE) have an interesting paper on Leveraging Monopoly Power by Degrading Interoperability: Theory and evidence from computer markets.

ABSTRACT: When will a monopolist have incentives to foreclose a complementary market by degrading compatibility/interoperability of his products with those of rivals? We develop a framework where leveraging extracts more rents from the monopoly market by 'restoring' second degree price discrimination. In a random coefficient model with complements we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft’s strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system which allows for complements (PCs and servers). Our estimates suggest that there were incentives to reduce interoperability which were particularly strong at the turn of the 21st Century.

Doctors’ remuneration schemes and hospital competition in two-sided markets with common network externalities

Posted by D. Daniel Sokol

David Bardey (University of Rosario) Helmuth Cremer (Toulouse School of Economics) and Jean-Marie Lozachmeur (Toulouse School of Economics) describe Doctors’ remuneration schemes and hospital competition in two-sided markets with common network externalities.

ABSTRACT: This paper uses a two-sided market model of hospital competition to study the implications of different remunerations schemes on the physicians'side. The two-sided market approach is characterized by the concept of common network externality (CNE)introduced by Bardey et al. (2010). This type of externality occurs when occurs when both sides value, possibly with di¤erent intensities, the same network externality. We explicitly introduce e¤ort exerted by doctors. By increasing the number of medical acts (which involves a costly e¤ort) the doctor can increase the quality of service o¤ered to patients (over and above the level implied by the CNE). We first consider pure salary,capitation or fee-for-service schemes. Then, we study schemes that mix fee-for-service with either salary or capitation payments. We show that salary schemes (either pure or in combination with fee-for-service) are more patient friendly t! han (pure or mixed)capitations schemes. This comparison is exactly reversed on the providers'side. Quite surprisingly, patients always loose when a fee-for-service scheme is introduced (pure of mixed). This is true even though the fee-for-service is the only way to induce the providers to exert e¤ort and it holds whatever the patients'valuation of this effort. In other words, the increase in quality brought about by the fee-for-service is more than compensated by the increase in fees faced by patients.

Intrafirm conflicts and interfirm competition

Posted by D. Daniel Sokol

Werner Guth (Max Planck Institute of Economics), Kerstin Pull (University of Tubingen, Department of Economics and Business Administration) & Manfred Stadler (University of Tubingen, Department of Economics and Business Administration) explore Intrafirm conflicts and interfirm competition.

ABSTRACT: We study strategic interfirm competition allowing for internal conflicts in each seller firm. Intrafirm conflicts are captured by a multi-agent framework with principals implementing a revenue sharing scheme. For a given number of agents, interfirm competition leads to a higher revenue share for the agents, higher equilibrium effort levels and higher agent utility, but lower profits for the firms. The winners from antitrust policy are thus not only the consumers but also the agents employed by the competing firms.

The Power of Google: Serving Consumers or Threatening Competition?

Posted by D. Daniel Sokol

You can get a webcast of yesterday's hearing for The Power of Google: Serving Consumers or Threatening Competition?

Schmidt's statement is here.

Exchange of private demand information by simultaneous signaling

Posted by D. Daniel Sokol

Manfred Stadler (University of Tubingen, Department of Economics) has written on Exchange of private demand information by simultaneous signaling.

ABSTRACT: As is well-known from the literature on oligopolistic competition with incomplete information, firms have an incentive to share private demand information. However, by assuming verifiability of demand data, these models ignore the possibility of strategic misinformation. We show that if firms can send misleading demand information, they will do so. Furthermore, we derive a costly signaling mechanism implementing demand revelation, even without verifiability. For the case of a gamma distribution of the firms' demand variables, we prove that the expected gross gains from information revelation exceed the expected cost of signaling if the skewness of the distribution is sufficiently large and the products are sufficiently differentiated.

Merger Efficiency and Welfare Implications of Buyer Power

Posted by D. Daniel Sokol

Ozlem Bedre-Defolie (European School of Management and Technology) and Stephane Caprice (Toulouse School of Economics) explore Merger Efficiency and Welfare Implications of Buyer Power.

ABSTRACT: This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are "waterbed effects", that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, "anti-waterbed effects", if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the fi! nal price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.

Multiproduct pricing and the Diamond Paradox

Posted by D. Daniel Sokol

Andrew Rhodes analyzes Multiproduct pricing and the Diamond Paradox.

ABSTRACT: We study the pricing behavior of a multiproduct monopolist, when consumers must pay a search cost to learn its prices. Equilibrium prices are high because rational consumers understand that visiting the store exposes them to a hold-up problem. However a firm with more products attracts more consumers with low valuations, and therefore charges lower prices. We also show that when the firm advertises the price of one product, it provides consumers with some indirect information about all of its other prices. The firm can therefore build a store-wide ‘low-price image’ by advertising just one product at a low price.

Inventories and Endogenous Stackelberg Leadership in Two-period Cournot Oligopoly

Posted by D. Daniel Sokol

Sebastien Mitraille (Toulouse Business School) and Michel Moreaux (Toulouse School of Economics (IDEI and LERNA)) discuss Inventories and Endogenous Stackelberg Leadership in Two-period Cournot Oligopoly.

ABSTRACT: Two-period Cournot competition between n identical firms producing at constant marginal cost and able to store before selling has pure strategy Nash- perfect equilibria, in which some firms store to exert endogenously a leader- ship over rivals. The number of firms storing balances market share gains, obtained by accumulating early the output, with losses in margin resulting from increased competition and higher operation costs. This number and the industry inventories are non monotonic in n. Concentration (HHI) and competition increase due to the strategic use of inventories.

Israel: Old School Trustbusting Meet New School Conglomerate Busting

Posted by D. Daniel Sokol

There is an interesting story today about the Israeli government's moves to break up the conglomerates that control large parts of the Israeli economy.

Given that in a number of countries conglomerates control large parts of the economiy (see the importantant cross country work by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer on Corporate Ownership Around the World) maybe this could be the start of a much larger trend.

Stackelberg oligopoly TU-games: characterization of the core and 1-concavity of the dual game

Posted by D. Daniel Sokol

Theo Driessen (Department of Applied Mathematics - University of Twente), Dongshuang Hou (Department of Applied Mathematics - University of Twente) and Aymeric Lardon (GATE Lyon Saint-Etienne) describe Stackelberg oligopoly TU-games: characterization of the core and 1-concavity of the dual game.

ABSTRACT: In this article we consider Stackelberg oligopoly TU-games in gamma-characteristic function form (Chander and Tulkens 1997) in which any deviating coalition produces an output at a first period as a leader and outsiders simultaneously and independently play a quantity at a second period as followers. We assume that the inverse demand function is linear and that firms operate at constant but possibly distinct marginal costs. Generally speaking, for any TU-game we show that the 1-concavity property of its dual game is a necessary and sufficient condition under which the core of the initial game is non-empty and coincides with the set of imputations. The dual game of a Stackelberg oligopoly TU-game is of great interest since it describes the marginal contribution of followers to join the grand coalition by turning leaders. The aim is to provide a necessary and sufficient condition which ensures that the dual game of a Stack! elberg oligopoly TU-game satisfies the 1-concavity property. Moreover, we prove that this condition depends on the heterogeneity of firms' marginal costs, i.e., the dual game is 1-concave if and only if firms' marginal costs are not too heterogeneous. This last result extends Marini and Currarini's core non-emptiness result (2003) for oligopoly situations.

Google Foes Circle for Attack Before Congressional Hearing

Posted by D. Daniel Sokol

Today's WSJ has an interesting story (with the great headline of Google Rivals Plan Antitrust Assault that gives what I think is a realistic sense of the militarized notion of the warfare between the two sides) about the latest in the Google antitrust search saga.

On file sharing with indirect Network effects between concert ticket sales and music recordings

Posted by D. Daniel Sokol

Ralf Dewenter, Justus Haucap, Tobias Wenzel (all Duesseldorf Institute for Competition Economics) provide their thoughts On file sharing with indirect Network effects between concert ticket sales and music recordings.

ABSTRACT: This paper analyses the interdependency between the market for music recordings and concert tickets, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. In a model with two interrelated Hotelling lines prices in both markets are corrected downwards when compared to the standard Hotelling model. Also, file sharing has ambiguous effects on firms' profitability. As file sharing can indirectly increase demand for live performances overall profits can either increase or decrease, depending on the strength of indirect network effects. Finally, file sharing may induce firms to switch from the traditional business model with two separate firms to an integrated business model where one agency markets both records and concerts (so-called 360 degree deals).

Use of Market Power and Counterfactuals in New Zealand and Australian Competition Laws

Posted by D. Daniel Sokol

Cento Veljanovski, Case Associates, Institute of Economic Affairs, Centre for Regulation and Market Analysis (CRMA) and Roger Featherston, have posted Use of Market Power and Counterfactuals in New Zealand and Australian Competition Laws.

ABSTRACT: These two papers look at recent decisions and controversies surrounding the counterfactual test under s 36 of the New Zealand Commerce Act 1986, and s46 of the Australian Competition and Consumer Act 2010 respectively. In 2010 the New Zealand Supreme Court in 0867 affirmed the counterfactual as the test to determine whether there has been a ‘use’ of market power (the equivalent of monopolisation under the Sherman Act, or abuse of dominance under Article 102TFEU) for a proscribed purpose. Veljanovski’s paper traces through the development of the s36 counterfactual, and concludes that it is flawed and potentially underinclusive. Featherston examines the development of and problems associated with the Australian equivalent s46 counterfactual and its relevance to New Zealand. Both papers were delivered at the 25th Competition Policy and Law Institute of New Zealand (CPLINZ) conference held in Wellington in August 2011.

Rummaging Through the Bottom of Pandora’s Box: Funding Predatory Pricing Through Contemporaneous Recoupment

Posted by D. Daniel Sokol

Shaun D. Ledgerwood, The Brattle Group, Georgetown University - Public Policy Institute (GPPI) and Wesley J. Heath address Rummaging Through the Bottom of Pandora’s Box: Funding Predatory Pricing Through Contemporaneous Recoupment.

ABSTRACT: Predatory pricing doctrine is currently a dead area of the law. To proceed beyond summary judgment, a plaintiff must prove the predation created a “dangerous probability” of supracompetitive pricing as the mechanism for recouping the losses “invested” in the predation. This requires proof that the predator sold products below its average variable cost and raised an entry barrier that ultimately enabled the recoupment of profits at some later time. We offer an alternative to this two-phased recoupment model. In this paper we show that a multiproduct retailer can target loss leading behavior in a market segment to punish or eliminate specific rivals with less product diversity. In the process the retailer increases the foot traffic into its store and hence increases the sales of other products such that it recoups some or all of the predation losses contemporaneously. We demonstrate the significant, long-term inefficiency of predation funded through contemporaneous recoupment and discuss how existing predation law must adapt to accommodate its possibility. We offer straightforward tests to detect the presence of recoupment through contemporaneous means or through the combination of contemporaneous recoupment and traditional recoupment through supracompetitive pricing. The potential for contemporaneous recoupment, at a minimum, increases the “dangerous probability” that supracompetitive pricing will provide the funds needed to make the predation possible. For multiproduct defendants this possibility raises an issue of fact that must allow the case to proceed beyond summary judgment.