Antitrust & Competition Policy Blog

Patent Length, Investment and Social Welfare

Posted by D. Daniel Sokol

James Bergin (Queen's University) explains Patent Length, Investment and Social Welfare.

ABSTRACT: The intent of the patent system is to encourage innovation by granting the innovator exclusive rights to a discovery for a limited period of time: with monopoly power, the innovator can recover the costs of creating the innovation which otherwise might not have existed. And, over time, the resulting innovation makes everyone better off. This presumption of improved social welfare is considered here. The paper examines the impact of patents on welfare in an environment where there are large numbers of (small) innovators. With patents, because there is monopoly for a limited time the outcome is necessarily not socially optimal, although social welfare may be higher than in the no-patent state. Patent acquisition and ownership creates two opposing incentives at the same time: the incentive to acquire monopoly rights conferred by the patent spurs innovation, but subsequent ownership of those rights inhibits innovation (both ! own innovation and that of others). On balance, which effect will dominate? In the framework of this paper separate circumstances are identified under which patents are either beneficial or detrimental to innovation and welfare; and comparisons are drawn with the socially optimal level of investment in innovation.

Managerial incentives under competitive pressure: Experimental investigation

Posted by D. Daniel Sokol

Ahmed Ennasri (LAMETA, UFR d'Economie) and Marc Willinger (LAMETA, UFR d'Economie) explore Managerial incentives under competitive pressure: Experimental investigation.

ABSTRACT: We investigate the effects of competition on managerial incentives and effort in a laboratory experiment. Each owner offers compensation to his manager in two different contexts: monopoly and Cournot duopoly. After accepting the compensation, the manager chooses an effort level to increase the probability of reduced costs of his firm. Theory predicts that the entry of a rival firm in a monopolistic industry affects negatively both the incentive compensation and the effort level. Our experimental findings confirm that the entry of a rival firm reduces the incentive compensation but not the manager’s effort level. However, despite the reduction of the incentive compensation, the manager continues to accept the contract offers and exert the same level of effort.

Experimentation in Two-Sided Markets

Posted by D. Daniel Sokol

Martin Peitz (Department of Economics, University of Mannheim), Sven Rady (Department of Economics, University of Bonn), and Piers Trepper (Department of Economics, University of Munich) are writing on Experimentation in Two-Sided Markets.

ABSTRACT: We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is sufficiently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we ! identify special cases in which the undiscounted limit of the model can be solved in closed form.

Leadership in Multi-sided Markets

Posted by D. Daniel Sokol

Federico Etro (Department of Economics, University Of Venice Ca Foscari) has posted Leadership in Multi-sided Markets.

ABSTRACT: I analyze the role of leadership in multi-sided markets as online advertising. Search and display advertising are better characterized by (respectively) quantity and price competition. A platform that reached dominance in search may have an incentive to limit services to consumers to be aggressive with the advertisers, to exploit its scale in search to build barriers to entry, or to adopt click-weighted auctions to manipulate the pricing of sponsored links. On the other side, a dominant platform in display advertising may increase the rewards of content providers to increase prices on advertisers, or may adopt exclusive clauses to predate on other platforms.

Price Discrimination in Many-to-Many Matching Markets

Posted by D. Daniel Sokol

Renato Gomes (Toulouse School of Economics) and Alessandro Pavan (Northwestern) explain Price Discrimination in Many-to-Many Matching Markets.

ABSTRACT: We study second-degree price discrimination in markets where the product traded by the monopolist is access to other agents. We derive necessary and sufficient conditions for the welfareand the profit-maximizing mechanisms to employ a single network or a menu of non-exclusive networks. We characterize the optimal matching schedules under a wide range of preferences, derive implications for prices, and deliver testable predictions relating the structure of the optimal pricing strategies to conditions on the distribution of match qualities. Our analysis sheds light on the distortions associated with the private provision of broadcasting, health insurance and job matching services.

The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly

Posted by D. Daniel Sokol

Takanori Adachi (School of Economics, Nagoya University) and Noriaki Matsushima (Institute of Social and Economic Research, Osaka University) explore The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly.

ABSTRACT: This paper studies the welfare effects of third-degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the "strong" market (where the discriminatory price is higher than the uniform price) than in the "weak" market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely due to an increase in the firms' profits.

The monopoly benchmark on two-sided markets

Posted by D. Daniel Sokol

Christopher Mullera and Enrico Bohme (both Goethe Universitat Frankfurt) presents The monopoly benchmark on two-sided markets.

ABSTRACT: The literature on the effects of market concentration in platform industries or two-sided markets often compares the competitive outcome against a benchmark. This benchmark is either the “joint management” solution in which one decision maker runs all platforms or a “pure” monopoly with just one platform. Literature has not generally discussed, which benchmark is the appropriate one. We show that the appropriate benchmark, i.e. how many platforms the monopolist will operate, depends on whether agents multi- or singlehome, whether the externalities are positive or negative, and in some cases on the properties of the demand functions. Different situations require different benchmarks. Our results also help to anticipate the effects of proposed platform mergers, where the assessment might crucially depend on the number of platforms after a merger.

Informative Advertising, Consumer Search and Transparency Policy

Posted by D. Daniel Sokol

Chengsi Wang, School of Economics, University of New South Wales has written on Informative Advertising, Consumer Search and Transparency Policy.

ABSTRACT: Information about a new or non-frequently purchased product is often produced by both sides of the market. We construct a monopoly pricing model consisting of both seller's information disclosure and consumer's information acquisition. The presence of consumer search, which lowers the probability of making sales, creates incentive for the monopolist to deter search. In contrast with most previous literature, we show that, partial information disclosure arises in equilibrium when the search cost is low. As the search cost increases to medium level, the monopolist hides information but lowers the price to prevent consumers from searching. When the search cost is very high, the monopolist charges high price and hides all information. The equilibrium price is thus non-monotonic in search cost. Information disclosure and consumer search co-exist only when the search cost is low, and thus complement each other. We show that tr! ansparency policies on advertising cannot improve social welfare. Nevertheless, they benefit consumers in a wide range of values of the search costs by improving matching quality and reducing the expense of searching. But for some medium levels of search costs, transparency policies hurt consumers due to the induced high price in equilibrium.

Preference for Variety

Posted by D. Daniel Sokol

Karen Kaiser and Rainer Schwabe (both Banco de Mexico) address Preference for Variety.

ABSTRACT: We consider a decision maker who enjoys choosing from a varied set of alternatives. Building on behavioral evidence, we propose testable axioms which characterize preference for variety, and provide a representation theorem. We go on to illustrate the potential effects of preference for variety in a model of retailing. Consumer welfare may be decreasing in the competitiveness of the retailing sector as competition eliminates the scope for retailers to offer variety. Mainstream consumers with a preference for variety and consumers with eccentric tastes enjoy a symbiotic relationship. Competition over mainstream consumers makes retailers offer more exotic goods, while eccentric consumers subsidize their carrying costs.

Partial Acquisitions: Recent MOFCOM Action Suggests Possible Divergence with U.S. Standards

Posted by D. Daniel Sokol

Paul Cuomo, Changrong Xu, & Charles M. Malaise (Baker Botts) have written on Partial Acquisitions: Recent MOFCOM Action Suggests Possible Divergence with U.S. Standards.

ABSTRACT: Long ago, the U.S. Supreme Court confirmed that partial acquisitions are subject to the Clayton Act's prohibition against transactions that may substantially lessen competition. Since that time, the Department of Justice and Federal Trade Commission have challenged many partial acquisitions (as have private plaintiffs-typically firms attempting to fend off hostile tender offers). And, after years of explaining their views in consent decrees and litigated cases, the agencies included an entire section on partial acquisitions in the 2010 Horizontal Merger Guidelines. While the agencies have challenged partial acquisitions in a variety of contexts and have imposed a variety of remedies, all such challenges share an underlying theme-there must be more than an "ephemeral possibility" that a transaction may cause competitive harm. As one court has explained, in order to violate the Clayton Act, a transaction must create an "appreciable danger" of anticompetitive effects.

Merger enforcement in China is not as well-established as it is in the United States and the Ministry of Commerce of the People's Republic of China is still developing its substantive and procedural standards. There is no doubt, however, that, as in the United States, partial acquisitions can violate China's Anti-Monopoly Law ("AML"), although MOFCOM has provided little guidance to date on how it will apply the AML to partial acquisitions. MOFCOM's recent enforcement action in the Alpha V-Savio transaction required remedies because MOFCOM "could not rule out the possibility" that a partial acquisition "might have" anticompetitive effects. Whether this recent action suggests that MOFCOM may be adopting something akin to an ephemeral possibility standard, and will be much less tolerant of partial acquisitions than their counterparts in the United States, remains to be seen.

Buyer Power and Intraband Coordination

Posted by D. Daniel Sokol

Jeanine Miklos-Thal University of Rochester and ZEW Mannheim, Patrick Rey Toulouse School of Economics (GREMAQ and IDEI) and Thibaud Verge CREST (Laboratoire d'Economie Industrielle) discuss Buyer Power and Intraband Coordination.

ABSTRACT: We analyse the competitive effects of various contractual provisions in a situation where rival retailers make offers to a common manufacturer. In contrast to Marx and Shaffer (2007), who find that a strong retailer can use slotting allowances (that is, upfront payments from manufacturers) to exclude its weaker rival, we show that foreclosure is no longer inevitable once retailers' offers can be contingent on the relationship being exclusive or not. There then exist equilibria that sustain the industry monopoly outcome; moreover, as long as retailers can use non-linear tariffs, such equilibria exist irrespectively of whether slotting allowances are allowed or banned. Non-contingent contracts, on the other hand, necessarily lead to exclusion, with or without slotting allowances. A ban on slotting allowances may therefore prove ineffective, while a ban on exclusive dealing options in supply contracts leads to foreclosure.

Experimentation in Two-Sided Markets

Posted by D. Daniel Sokol

Martin Peitz, University of Mannheim - Department of Economics, Sven Rady, University of Bonn, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), and Piers Trepper, Ludwig Maximilians University of Munich describe Experimentation in Two-Sided Markets.

ABSTRACT: We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profi t stream in a continuous-time infi nite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is suffi ciently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

Conference Announcement: Buyer Power in Competition Law - Tuesday 15 May 2012 0930

Posted by D. Daniel Sokol

Buyer Power in Competition Law

Tuesday 15 May 2012 0930

Venue: St Catherine's College Mary Sunley Lecture Theatre

Organised by Centre for Competition Law & Policy in conjunction with Oxford/Stockholm Wallenberg Venture

Buyer power enables a single buyer, or a group of buyers, to influence or dictate the terms of trade with upstream suppliers. This power may stem from strategic advantages enjoyed by the purchaser. Alternatively, it may derive from the attainment of a dominant or collective dominant position on the input market. 

Powerful buyers are capable of obtaining favourable commercial terms and extract greater value from the upstream suppliers. Such power, and the subsequent reduction in input costs, may lead to reduction in price to consumers and increase consumer welfare. This is often facilitated by economies of scale and efficiencies in distribution. These efficiencies, and the greater values extracted from the upstream suppliers may often benefits consumers and enhance consumer welfare. Yet at times, buyer power may have adverse effects on welfare. Powerful buyers may refrain from passing savings to consumers, increase the output price, distort competition upstream and abuse their market power. 

The assessment of the welfare effects generated by buyer power is often challenging. It depends on the nature of buyer power, being monopsony or bargaining power, and the market characteristics. It requires careful balancing between short, mid, and long term welfare effects.

The one day event will bring together leading academics, practitioners and competition officials to discuss questions of policy, economics and law. The discussion will focus on the treatment of buyer power in merger analysis, the dividing line between buying alliances and buyer cartels, and the possible abuse of buyer power. The effects of buyer power in the retail and agricultural sectors will also be explored.

 

Speakers include:

Claes Bengtsson, European Commission

Matthew Bennett, Office of Fair Trading

Ulf Bernitz, Oxford IECL

Peter Carstensen, University of Wisconsin Law School

Cristina Caffarra, CRA

Ariel Ezrachi, Oxford CCLP 

Lars Henriksson, Stockholm School of Economics

Matthew Johnson, OXERA

Jack Kirckwood, Seattle University School of Law

Birgit Krueger, Bundeskartellamt

Andrew McCarthy, British Brands

Michael Rowe, Slaughter and May

Howard Smith, Oxford University

Maurice E. Stucke, University of Tennessee

John Thanassoulis, Oxford University

Bob Young, Europe Economics

 

The cost of the conference is £50 which includes a registration fee, lunch, refreshments and all conference materials. To register and pay please click here.

This conference is accredited with CPD hours by the Solicitors Regulation Authority and the Bar Standards Board. Number of accredited hours to be confirmed. 

For more information on this event, please contact: Jenny Dix

The Conference Programme can be viewed here (Acrobat PDF file)

From Regulatory Tool to Competition Law Rule: The Case of Margin Squeeze under EU Competition Law

Posted by D. Daniel Sokol

Hendrik Auf'mkolk, University of Muenster, has posted From Regulatory Tool to Competition Law Rule: The Case of Margin Squeeze under EU Competition Law.

ABSTRACT: The concept of margin squeeze has recently emerged into a stand-alone abuse of dominance under EU competition law. It is no coincidence that this development was triggered by a series of high-profile cases involving former statutory monopolists in newly liberalized telecommunication markets. As this paper shows, the concurrent application of competition law and regulation in these cases had a ‘feedback effect’ on the competition law concept of margin squeeze itself. It has been continually broadened to pursue regulatory goals and impose quasi-regulatory remedies. In the process, imputation tests designed to help regulators determine entry-inducing access prices have become competition law standards applicable beyond the realm of regulated network industries and bottleneck facilities. While this may facilitate the scaling back of sector-specific regulation it does not come without risks to legal and economic coherence. Against this background, this paper reviews the evolution of the margin squeeze doctrine under EU competition law and asks whether it should serve as a blueprint for the transition from regulation to competition.

Product Bundling and Incentives for Merger and Strategic Alliance

Posted by D. Daniel Sokol

Sue Mialon (Emory) has a new paper on Product Bundling and Incentives for Merger and Strategic Alliance.

ABSTRACT: This paper analyzes firms' choice between a merger and a strategic alliance in bundling their product with other complementary product. We consider a framework in which firms can improve profits only from product bundling. While mixed bundling is not profitable, pure bundling is because pure bundling reduces consumers' choices, and thus, softens competition among firms. Firms benefit the most from this reduced competition if they form an alliance. Firms do not gain as much from a merger because, internalizing the complementarity between the two products, a merged firm is inclined to pursue aggressive pricing to gain market share. Yet, firms may be motivated to choose a merger over an alliance because of foreclosure possibility as foreclosure is not possible under strategic alliance. However, in response, unmerged rivals can use a strategic alliance to avert foreclosure. Hence, the possibility of counter-bundling via stra! tegic alliance by rivals reduces the incentives for merger. In equilibrium, bundling is offered only through strategic alliances.

The 2011 Basketball Lockout The Union Lives to Fight Another Day—Just Barely

Posted by D. Daniel Sokol

William B. Gould IV (Stanford Law) has a short piece on The 2011 Basketball Lockout The Union Lives to Fight Another Day—Just Barely.

Market Power in EU Antitrust Law

Posted by D. Daniel Sokol

Luis Ortiz Blanco (Garrigues and College of Europe) has a new book on Market Power in EU Antitrust Law.

BOOK ABSTRACT: The notion of market power is central to antitrust law. Under EU law, antitrust rules refer to appreciable restrictions of competition (Article 101 (1) TFEU, ex Article 81(1) TEC), the elimination of competition for a substantial part of the market (Article 101 (3) TFEU, ex Article (81(3) TEC), dominant positions (Article 10 2 TFEU, ex Article 82 TEC) and substantial impediment to effective competition, in particular by creating or reinforcing a dominant position (Article 2 of the EU Merger Regulation). At first sight, only the concept of dominant position relates to market power but it is the aim of this book to demonstrate that the other concepts are directly linked to the notion of market power. This is done by reference to the case law of the EU Courts and the precedents of the European Commission and the author goes on to argue that for very good reasons (clarity and enforceability, among others) the rules should be interpreted in this way.

Beginning with market definition, the book reviews the different rules and the different degrees of market power they incorporate. Thus it analyses the notion of 'appreciable restriction of competition' to find a moderate market power obtained by agreement among competitors to be the benchmark for the application of Article 101 TFEU, ex Article 81TEC. It then goes on to the concept of dominance under Article 102 TFEU, ex Article 82 TEC, which is equivalent to substantial (or important) market power and then focuses on the old and new tests for EU merger control. Finally, it addresses the idea of elimination of competition in respect of a substantial part of the market (Article 101 (3) TFEU, ex Article 81 (3) (b) TEC), in which the last two types of market power (Article 102 TFEU, ex Article 82 TEC and EU Merger Regulation) converge. To exemplify this, an in-depth study of the notion of collective dominance is made.

The book concludes that a paradigm of market power exists under the EU antitrust rules that both fits with past practice and provides for a useful framework of analysis for the general application of the rules by administrative and even more importantly judicial authorities in the Member States, under conditions of legal certainty.

An Overview of Competition Law in Southeast Asia

Posted by D. Daniel Sokol

Robert Ian McEwin (Director, Global Economics Group; Visiting Professor of Law, National University of Singapore and Chulalongkorn University, Bangkok; Senior Advisor, Rajah & Tann, Singapore) discusses competition laws and regulators in the ASEAN countries. His overview also covers the two main approaches to abuse of dominance--regulatory abuse of dominance and ex-post regulation--and the two main approaches to merger review.

Download video lecture (.wmv file format)

Download lecture slides (.ppt file format)

Refusals to License Intellectual Property: Testing the Limits of Law and Economics

Posted by D. Daniel Sokol

Ian Eagles (Auckland University of Technology) and Louise Longdin (Auckland University of Technology) have a new book on Refusals to License Intellectual Property: Testing the Limits of Law and Economics.

BOOK ABSTRACT: Economic analysis rarely appears on the judicial horizon in intellectual property litigation. In competition cases, by contrast, economists are familiar figures in the courtroom and the language of economics is scattered throughout the judgments of even the highest courts. One might expect, therefore, that refusals to license intellectual property would generate the same fruitful symbiosis between law and economics when those refusals surface in competition proceedings. This however, has not been how the law on this subject has developed in most jurisdictions. Courts and enforcement agencies faced with a unilateral refusal to license have instead tended to retreat into sketchily articulated black letter rules and presumptions which then have to be fenced off from the rest of competition law by economically irrelevant qualifications and distinctions based on private law categorisations of, and rationales for, individual intellectual property rights. This bypassing of case-by-case analysis in favour of more traditional modes of legal reasoning is not entirely the fault of lawyers. Economists have contributed to this state of affairs by urging judges and regulators to convert empirically undernourished theories about the proper role of intellectual property in a market economy into rules of law and evidentiary presumptions intended to be binding in future cases. How this came about and what it means for the future of effective competition enforcement globally are the twin concerns of this book.

Discounts and Rebates

Posted by D. Daniel Sokol

Anca Daniela Chirita, Durham Law School, Europa-Institut, Saarland University discusses Discounts and Rebates.

ABSTRACT: This sub-chapter deals comparatively with the rebate system under German and EU competition law in recent cases such as Intel, Imperial Chemicals, Tomra and the German ruling in the Rossmann case.