Antitrust & Competition Policy Blog

Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment

Posted by D. Daniel Sokol

Michiel J. Bijlsma, CPB Netherlands Bureau of Economic Policy Analysis, Tilburg Law and Economics Center (TILEC), Jan Boone, Tilburg University - Center for Economic Research (CentER), Centre for Economic Policy Research (CEPR), Institute for the Study of Labor (IZA), TILEC and Gijsbert Zwart, CPB Netherlands Bureau of Economic Policy Analysis, Tilburg Law and Economics Center (TILEC) examine Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment.

ABSTRACT: We study optimal risk adjustment in imperfectly competitive health insurance markets when high-risk consumers are less likely to switch insurer than low-risk consumers. First, we find that insurers still have an incentive to select even if risk adjustment perfectly corrects for cost differences among consumers. Consequently, the outcome is not efficient even if cost differences are fully compensated. To achieve first best, risk adjustment should overcompensate for serving high-risk agents to take into account the difference in markups among the two types. Second, the difference in switching behavior creates a trade off between efficiency and consumer welfare. Reducing the difference in risk adjustment subsidies to high and low types increases consumer welfare by leveraging competition from the elastic low-risk market to the less elastic high-risk market. Finally, mandatory pooling can increase consumer surplus even further, at the cost of efficiency.

Welfare Standards in Hospital Mergers

Posted by D. Daniel Sokol

Katalin Katona, Dutch Healthcare Authority, Tilburg Law and Economics Center (TILEC) and Marcel F. M. Canoy, European Union - European Commission discuss Welfare Standards in Hospital Mergers.

ABSTRACT: There is a broad literature on the consequences of applying different welfare standards in merger control. Specific aspects of health care mergers, however, have not yet been considered. Two features of the health care sector are especially relevant. First, health care providers are possi-bly not profit oriented. Second, consumers can be covered by a mandatory health insurance and pay uniform premiums. The fact and level of payment is not connected to the consumption of health care services, which makes the concept consumer in merger control ambiguous. Previous literature on welfare standards in merger control has often built on the general result that consumer welfare is a more restrictive standard than total welfare. We model mergers on hospital markets and allow for non-profit maximizing behavior of providers and mandatory health insurance. We show that applying a restricted interpretation of consumer in health care merger control can reverse the relation between the two standards. Consumer welfare standard can be weaker than total welfare. Consequently, applying the wrong standard can lead to both clearing socially undesirable and to blocking socially desirable mergers. The possible negative consequences of applying a simple consumer welfare standard in merger control can be even stronger when hospitals maximize quality and put less weight on financial considerations. We also relate these results to the current practice of merger control.

Corporate Compliance - Enron and Sarbanes Oxley (To Music)

Posted by D. Daniel Sokol

I use an Enron case study for class to discuss problems of corporate governance/compliance and regulatory response to crisis in my Business Associations class. The case study is in Smith and Williams, Business Organizations.  I also have an evening showing of the documentary Smartest Guys in the Room, based on the book by the same name about Enron for the class. One of my current students felt so moved on Monday that he created a song (based on Gangster's Paradise). The lyrics are below.  You can also listen to the song.

 

 

Download Juans Jam

 

 

As I walk through the (SILICON) valley of death

I take a look at my (ENRON STOCK AND ) realize there's no more left

Cause I've been (COOKING THE BOOKS) for so long that

Even (THE GAAP) thinks that my mind is gone

But I ain't never crossed (AN AGENCY) that didn't deserve it

(FASTOW) be treated like a punk, you know that's unheard of
You better watch how you (NEGOTIATE), and where you (WORKING)

Or you and your homies might be lined up in (COURT)

I really hate to trip, but I gotta lop'-

As they grew I see myself in the (GOLDEN PARACHUTE) fool

I'm the kinda (CEO) the (EXECUTIVES) wanna be like

In my  (PORSHE) at night

(EMBEZZLING MY  FUNDS) in the street light

 

Been spending most our lives living in the SMARTEST GUY's  Paradise

Been spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

 

They got the situation, they got me facin'

I can't live a normal life, I was raised by the (WEALTHY)

So I gotta be down with (KEEP STASHING CASH OVERSEAS)

Too much (OFF-BALANCE SHEET ACCOUNTING) got me chasin' dreams

I'm an educated fool with money on my mind

Got my SPE's  in my hand and a (GENIUS MBA) in my (GANG)

I'm a loc'ed out wall street gangsta, CORPORATE banger

And my (BOARD MEMBERS) (ARE)down, so don't arouse my anger, fool

(PRISON)  ain't nuthin but a heart beat away

I'm livin (THE WHITE COLLAR LIFE) , YO what can I say?

I'm 61 now, but will I live to see SARBANES AND OXLEY?

The way things are goin' I don't think they ll ever catch me

 

Tell me why are we, so blind to see

ENRON's hidden SPE's

 

Been spending most our lives living in the SMARTEST GUY's  Paradise

Been spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

 

Power and the money, money and the power

Minute after minute, hour after hour

(SHAREHOLDERS)  runnin, but half of them ain't lookin

What's goin on in the kitchen, but I dont know what's cookin

(Skilling) say I got ta learn, but noones here to teach me,

If  (THE COURT) cant understand it, how can they reach me?

I guess they can't; I guess they won't

I guess its cool; they’ll call it the  BUSINESS JUDGMENT, RULE!

 

Been spending most our lives living in the SMARTEST GUY's  Paradise

Been spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

Keep spending most our lives living in the SMARTEST GUY's  Paradise

 

Tell me why are we, so blind to see

ENRON's hidden SPE's

Tell me why are we, so blind to see

ENRON's hidden SPE's

 

 

Antitrust as Regulation

Posted by D. Daniel Sokol

Alan James Devlin, University of Dublin - Trinity College, University College Dublin (UCD) explores Antitrust as Regulation.

ABSTRACT: Antitrust, properly understood, plays a modest role in constraining commercial behavior. With respect to unilateral conduct, it does not prohibit monopoly or the fortuitous or quality-based acquisition of the same. It generally permits dominant companies to enjoy the fruits of their positions and does not speak to the propriety of excessive pricing. It does not impose service obligations on monopolists; nor does it generally limit their right to price discriminate amongst their consumers. It merely prohibits monopolists’ artificial creation of impediments to competition - so-called “exclusionary practices.” With respect to concerted behavior, the law allows a vast swathe of private agreements, even between rivals and if restrictive of competition, so long as the arrangement sufficiently promotes the well being of consumers. These tenets of competition policy reflect a sound maxim: antitrust is not regulation.

Unfortunately, the judiciary has lost sight of this rudimentary principle. The erosion began subtly, as lower courts rewrote antitrust law’s principal mode of analysis, the rule of reason. According to the Supreme Court’s seminal pronouncement of the rule, if economic analysis reveals that a practice enhances an appropriate measure of consumer welfare, the practice is lawful. That analytic inquiry does not insist that companies calibrate their behavior to maximize efficiency. The U.S. Courts of Appeals, however, have rewritten the rule of reason to require more. Today, an antitrust defendant cannot necessarily prevail by showing that its challenged restraint is welfare enhancing. Instead, if a court finds that a defendant could have achieved comparable efficiency gains in a manner less prejudicial to competition, a violation of the Sherman Act will follow.

Although recent calls for antitrust to require the best have intuitive appeal, policymakers should reject them in most cases. Where welfare analysis requires one to appeal to a hypothetical counterfactual - as it typically the case — courts invariably operate in an error-prone manner. Here, antitrust should play a role founded on incremental improvement over the status quo. Any other function would blur the lines between antitrust and regulation, thus subjecting the courts and agencies to tasks for which they are ill suited. Recent enforcement actions and judicial proceedings reveal the dangers of requiring welfare maximization, as antitrust now threatens to undo desirable gains in a self-defeating pursuit for more.

Former FTC Commissioner William E. Kovacic Named Recipient of 2011 Miles Kirkpatrick Award

Posted by D. Daniel Sokol

FTC Chairman Leibowitz named Bill Kovacic the winner of the 2011 Miles W. Kirkpatrick Award for Lifetime FTC Achievement. If you were to cut Bill open, he would bleed FTC. Bill's work in a number of capacities - GC, Commissioner and Chairman (plus junior staffer back in the day) has focused on ensuring that the FTC makes a meaningful impact on the lives of consumers in the US and around the world. I could not be more in agreement with the award choice. Bill is a very deserving recipient.

Abuse of Collective Dominance under the Competition Law of the Russian Federation

Posted by D. Daniel Sokol

Svetlana Avdasheva (Professor of Economics, Higher School of Economics, Moscow), Nadezhda Goreyko (Junior Researcher, Institute for Industrial and Market Studies, Higher School of Economics, Moscow), and Russell Pittman (DOJ) address Abuse of Collective Dominance under the Competition Law of the Russian Federation.

ABSTRACT: In 2006, Russia amended its competition law and added the concepts of “collective dominance” and its abuse. This was seen as an attempt to address the common problem of “conscious parallelism” among firms in concentrated industries. Critics feared that the enforcement of this provision would become tantamount to government regulation of prices. In this paper we examine the enforcement experience to date, looking especially closely at sanctions imposed on firms in the oil industry. Some difficulties and complications experienced in enforcement are analyzed, and some alternative strategies for addressing anticompetitive behavior in concentrated industries discussed.

How Well Do Travel Cost Models Measure Competition Among Hospitals?

Posted by D. Daniel Sokol

Michael J. Doane, Competition Economics LLC Luke M. Froeb, Vanderbilt University - Owen Graduate School of Management and R. Lawrence Van Horn, Owen Graduate School of Management, Vanderbilt University ask How Well Do Travel Cost Models Measure Competition Among Hospitals?

ABSTRACT: Health plans create competition among hospitals by threatening to “steer” patients to preferred facilities. Mergers can reduce this competition and economists have begun using travel cost demand models to estimate their effects. In this paper, we document an anomaly in estimation: for any plausible estimate of the opportunity cost of time, the price of hospital service is several orders of magnitude larger than the estimated value that patients place on the service. This anomaly raises questions about how well travel cost models measure demand for medical care, competition among hospitals, and the increase in bargaining power created by merger.

The Complexity of Cartel Enforcement in Times of Globalization of Competition Law

Posted by D. Daniel Sokol Frank Montag & Daniel Colgan (Freshfields) address The Complexity of Cartel Enforcement in Times of Globalization of Competition Law. ABSTRACT: On the twentieth anniversary of the signing of a Cooperation Agreement between the United States government and the European Commission ("EC") to enhance the effective application of their respective competition laws, it is fitting to undertake a review of the continuing significance of the relationship between the European Union and the United States in the current context of ever greater "globalization" of competition law. Indeed, much has changed in the intervening two decades, both in terms of the nature and output of the EU/U.S. relationship and in terms of the backdrop created by the ever-tightening network of antitrust agencies around the world.

The EU/U.S. cooperative relationship has not always progressed smoothly. There is an inevitable amount of divergence in substantive law and policy but, by common consensus, the positive approach taken by both agencies has been a hallmark of the global competitive order for twenty years. This paper seeks to put this relationship in a contemporary context, highlighting how the globalization of competition law adds complexity to cartel enforcement, thereby rendering the ground for companies that are under investigation more challenging.

Competition and Innovation

Posted by D. Daniel Sokol

Michele Boldrin, Washington University, Juan Correa Allamand Ministry of Finance, Chile. David K. Levine, Washington University and Carmine Ornaghi, University of Southampton have posted a controversial paper on Competition and Innovation.

ABSTRACT: Which kind of intellectual property regime is more favorable to innovation: one that enforces patents or one that does not? Economic theory is unable to answer this question, as valid arguments can be made both for and against patents; hence we must turn to empirical evidence. In this paper, we review empirical evidence gathered by other researchers and add new evidence of our own. We conclude that the evidence suggests that patents do not promote innovation, but instead retard it.

Endogenous Competition Alters the Structure of Optimal Auctions

Posted by D. Daniel Sokol

Ronald M Harstad (The Institute of Social and Economic Research Osaka University) argues that Endogenous Competition Alters the Structure of Optimal Auctions.

ABSTRACT: Potential bidders respond to a sellerfs choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Sellerfs surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction market! s are seen to be flawed in their identification of the number of bidders.

Open strategies and innovation performance

Posted by D. Daniel Sokol

Andres Barge-Gila has written on Open strategies and innovation performance.

ABSTRACT: Scholarly interest in the relationship between open strategies and innovation performance has been unfailing, and in recent years has even increased. The present paper focuses on inbound open strategies and reviews various approaches (transaction costs, competences, open innovation) dealing with firms´ decisions about these strategies. The different approaches result in different conclusions about the optimum level of openness. The different approaches are tested empirically taking account of the different degrees of openness (closed, semiopen, open, ultraopen) and their effects on sales of new–to-the-market products, and using a panel of Spanish firms from a CIS-type survey for 2004-2008. Our results show that closed and semiopen strategies are the most common among Spanish firms and that open strategies produce the best performance, while semiopen strategies are more effective than closed ones. These results hold ac! ross different subsamples based on firm size and industry, and are robust to different ways of defining the indicators and to different estimation methods.

Chile's FNE Celebrates National Competition Day This Friday with a Special Program

Posted by D. Daniel Sokol

You can find more information here.

Law Prof Blog Traffic Rankings - We Make the List

Posted by D. Daniel Sokol

We are 31.

Law Prof Blog Traffic Rankings

Below are the updated quarterly traffic rankings (page views and visitors) of the Top 35 blogs edited by law professors with publicly available SiteMeters for the most recent 12-month period (October 1, 2010 - September 30, 2011), as well as the percentage change in traffic from the  prior 12-month period:

	Blog	Page View	Change
1	Althouse	18,044,829	+23.0%
2	Volokh Conspiracy	12,729,673	-11.4%
3	Legal Insurrection	6,977,583	+69.0%
4	Leiter: Philosophy	5,669,623	+25.6%
5	Hugh Hewitt	5,592,950	-23.5%
6	TaxProf Blog	3,758,696	-1.7%
7	Patently-O	3,546,493	-0.9%
8	Jack Bog's Blog	2,806,133	+6.3%
9	PrawfsBlawg	1,586,719	+7.8%
10	Sentencing Law & Pol'y	1,502,212	-9.7%
11	Concurring Opinions	1,346,565	-2.2%
12	The Faculty Lounge	1,169,358	+36.9%
13	Incidental Economist	1,054,048	n/a
14	Leiter: Law School	1,051,471	-7.9%
15	Balkinization	1,044,672	-7.8%
16	Opinio Juris	821,463	+7.0%
17	Harvard Law Corp Gov	741,873	+62.1%
18	Wills, Tr. & Est. Prof	479,159	+12.5%
19	Turtle Talk	449,149	n/a
20	Conglomerate	427,524	-27.4%
21	Truth on the Market	415,526	+250.1%
22	Mirror of Justice	402,915	+12.4%
23	ImmigrationProf Blog	376,849	-5.5%
24	The Right Coast	376,579	-30.5%
25	Religion Clause	372,509	+0.5%
26	Workplace Prof Blog	359,553	-14.2%
27	Sports Law Blog	352,684	-5.0%
28	Election Law Blog	346,452	+38.7%
29	IntLawGrrls	338,363	+43.1%
30	Legal History Blog	337,014	-4.1%
31	Antitrust & Comp. Pol’y	332,586	+19.6%
32	White Collar Crime Prof	305,822	-3.7%
33	Constitutional Law Prof	300,856	-14.2%
34	Discourse.net	243,913	-19.6%
35	Legal Profession Blog	225,024	-11.6%

 

When do Mergers Raise Concerns? An Analysis of the Assessment Carried out by the European Commission under the New Merger Regulation

Posted by D. Daniel Sokol

Nadia Calvino (Deputy Director General in the Directorate General Internal Market) asks When do Mergers Raise Concerns? An Analysis of the Assessment Carried out by the European Commission under the New Merger Regulation.

ABSTRACT: During the period under review, all prohibitions, most remedies and the majority of interventions have been based on a finding of horizontal—mainly coordinated but also non coordinated—effects. The Commission has provided in-depth assessment of vertical mergers ranging from markets where vertical integration is a structural feature to others where the changing nature of operations makes predictions more difficult. In a number of cases, the Commission has assessed efficiency gains alleged by parties—not as a separate element to be offset against potential anticompetitive effects but as part of an integrated analysis of the potential impact of the merger. The guidelines drafted by the Commission have provided a reliable framework and have been complemented with increasingly sophisticated techniques allowing for a more economic approach to take shape in a way that appears accepted by the European courts.

Twenty Years of Transatlantic Antitrust Cooperation: The Past and the Future

Posted by D. Daniel Sokol

Rachel Brandenburger (DOJ) describes Twenty Years of Transatlantic Antitrust Cooperation: The Past and the Future.

ABSTRACT: I am deeply honored to have been asked to contribute to the celebratory publication of articles marking the 20th anniversary of the US/EU Cooperation Agreement. My appointment by then-Assistant Attorney General Christine Varney as Special Advisor, International, at the Antitrust Division of the U.S. Department of Justice ("DOJ"), demonstrates the importance the Antitrust Division attaches to international cooperation, and it gives me personally a privileged perspective on the nature of such cooperation with both the European Commission and the antitrust agencies around the world. Against that backdrop, I offer the following reflections on 20 years of transatlantic antitrust cooperation.

A mere 18 months passed between then-Competition Commissioner Sir Leon Brittan's first public reference to "the desirability of a treaty or less formal agreement" to deal with "the possibility of conflicts of jurisdiction" and the signing of the US-EC bilateral antitrust cooperation agreement on September 23, 1991. It is not surprising that the negotiators, including then-Assistant Attorney General Jim Rill, were able to produce the text-which became the model for many subsequent U.S. antitrust cooperation agreements-in a relatively short time, by the standards of international negotiations. This was clearly an idea whose time had come. Indeed, as then-Acting Attorney General Bill Barr noted upon signing, "the increasing integration of [the U.S. and EU] economies and the emergence of an international business environment make cooperation between [the U.S. and EU] governments in the area of antitrust enforcement absolutely essential." The EU's Merger Regulation had come into effect in 1990, the U.S. and EU economies were becoming increasingly integrated through trade and investment, and the two US antitrust agencies, the DOJ and the Federal Trade Commission ("FTC"), and the European Commission ("EC") were the most prominent actors in global competition law and policy.

The stated purpose of the agreement was "to promote cooperation and coordination and lessen the possibility or impact of differences between the Parties in the application of their competition laws." It was a forward-looking agreement based on mutual interest. It committed both the U.S. antitrust agencies and the EC to "render assistance" to each other's enforcement activities, and provided explicitly that, "in any coordination arrangement, each Party shall conduct its enforcement activities expeditiously and, insofar as possible, consistently with the enforcement objectives of the other Party." The agreement provided for "positive" comity, allowing the U.S. antitrust agencies or the EC to request that the other initiate appropriate enforcement activities under its own laws when the requesting party's important interests were affected. Finally, the agreement committed each party, at all stages of its enforcement activities, to take into account the important interests of the other party, with a list of factors to consider in balancing these interests.

As we now know, the 1991 Agreement ushered in an era of mutual respect, trust, expanded communication, and agreement as to common objectives and perspectives. This path-breaking agreement was not universally understood, however, or even welcomed, at the time. A Wall Street Journal editorial the day after the signing noted as "remarkable" the "extent to which it is being interpreted as an alliance against the Japanese." Antitrust practitioners were more concerned about lack of substantive convergence between the U.S. antitrust agencies and the EC, and feared the consequences of unchecked exchanges of confidential business information. The Financial Times cited competition experts who feared that "companies might face greater difficulty in winning approval because of the increased exchange of information by competition authorities"-despite the fact that the agreement did not provide for the exchange of confidential information.

Written with the benefit of hindsight, this article will examine each of these long-forgotten concerns, and explain why they have been displaced by the obvious success of the agreement's collaborative purpose.

The Application of Chinese Competition Law to Foreign Mergers: Lessons from the Draft New Guidelines

Posted by D. Daniel Sokol

Markus Masseli (Volkswagen Financial Services AG) has authored The Application of Chinese Competition Law to Foreign Mergers: Lessons from the Draft New Guidelines.

ABSTRACT: After three years of application, the impression remains that Chinese merger law only applies to foreign mergers and that domestic mergers remain uncontrolled. As regards foreign mergers, the control classically follows an economics-based approach centring on unilateral and coordinated effects which also extends to vertical and diagonal merges. Besides typical factors such as market concentration, market entry, efficiency defence and failing company defence, MOFCOM again made it quite clear, that industrial policy is on the agenda.

Applying Margin Squeeze in Telecommunications: Some Economic Insights

Posted by D. Daniel Sokol

Zoltan Biro, George Houpis and Matt Hunt, all at Frontier Economics discuss Applying Margin Squeeze in Telecommunications: Some Economic Insights.

ABSTRACT: We examine in this note the principles of the application of margin squeeze tests in telecommunications, focusing on three key elements in the application of an imputation test, where economic principles can provide guidance on the appropriate approach: the scope of a margin squeeze test, the form of the margin squeeze test and the appropriate cost concept. The case studies presented, reflecting the approach of different authorities to these three key elements of margin squeeze tests, suggest that there is still some divergence in terms of the reliance on economic principles to guide the approach to the imputation test. The significant growth of broadband markets over the last few years, combined with the emergence of a number of rivals to the incumbent operators, should provide an evidence basis for using economic principles to guide both the scope and the form of the imputation test in the future.

Competing by Restricting Choice: The Case of Search Platforms

Posted by D. Daniel Sokol

Hanna Halaburda, Harvard Business School and Mikolaj Jan Piskorski, Harvard University - Competition & Strategy Unit address Competing by Restricting Choice: The Case of Search Platforms.

ABSTRACT: We show that a two-sided platform can successfully compete by limiting the choice of potential matches it offers to its customers while charging higher prices than platforms with unrestricted choice. Starting from microfoundations, we find that increasing the number of potential matches not only has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents with heterogeneous outside options resolve the trade-off between the two effects differently. For agents with a lower outside option, the competitive effect is stronger than the choice effect. Hence, these agents have higher willingness to pay for a platform restricting choice. Agents with a higher outside option prefer a platform offering unrestricted choice. Therefore, the two platforms may coexist without the market tipping. Our model helps explain why platforms with different business models coexist in markets, including on-line dating, housing and labor markets.

Do Words Matter? A Discussion on Words Used to Designate Values Associated with Competition Law

Posted by D. Daniel Sokol

Paul Nihoul, Universite Catholique de Louvain asks Do Words Matter? A Discussion on Words Used to Designate Values Associated with Competition Law.

ABSTRACT: In scholarship, a significant degree of attention is paid to the goals or objectives to be pursued through antitrust or competition law. Much less, unfortunately, on the words that we use in order to express the values associated with these legal disciplines. In this paper, I shed some light on the communication used by authorities to describe their mission - and serve their agenda.

More news on Israeli Competition Issues

Posted by D. Daniel Sokol

There is more news from Israel on its Concentration Committee. See the latest here.