Antitrust & Competition Policy Blog

An Econometric Analysis of Insurance Markets with Separate Identification for Moral Hazard and Selection

Posted by D. Daniel Sokol

Shunya Sugawara (Graduate School of Economics, University of Tokyo) and Yasuhiro Omori (Faculty of Economics, University of Tokyo) undertake An Econometric Analysis of Insurance Markets with Separate Identification for Moral Hazard and Selection.

ABSTRACT: This paper proposes a simple econometric framework that can identify moral hazard and selection problems separately in insurance markets. Although our methodology requires behavioral assumptions on the consumer's optimization, we show that these assumptions are necessary for the separate identification of the two sources of information asymmetry. Our method is applied to the dental insurance market in the United States. In addition to standard moral hazard, we find advantageous selection, which is not detected by a conventional methodology.

Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010

Posted by D. Daniel Sokol

Ernst R. Berndt (MIT) and Pierre Dubois (Toulouse) discuss Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010.

ABSTRACT: Cross-country variability in regulatory frameworks, industrial policy, physician/pharmacy autonomy, brand/generic distinctions, and in the practice of medicine contributes to ambiguous interpretations of pharmaceutical cost comparisons. Here we report cross-country comparisons that: (i) focus on 11 therapeutic classes experiencing patent expiration and loss of exclusivity 2004-2010 in eight industrialized countries; (ii) convert revenues and unit sales to cost per day of treatment and number patient days treated using the World Health Organizations’ Defined Daily Dosage metrics; (iii) compare patterns in costs per day of treatment with price index measures based on average price per day of treatment for each molecule computed over all molecule versions; (iv) utilizing econometric methods, model and quantify various factors affecting variations in daily treatment price indexes such as national regulatory and reimburseme! nt policy changes, physician/pharmacy autonomy, and other factors; and (v) simulate changes in expenditures by country and therapeutic class had counterfactual policies been implemented.

The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data

Posted by D. Daniel Sokol

Erwan Gautiery (University of Nantes-LEMNA and Banque de France) and Ronan Le Saou (CREST-ENSAE and Ecole Polytechnique) explore The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data.

ABSTRACT: Using millions of individual gasoline prices collected at a daily frequency, we examine the speed at which market refined oil prices are transmitted to consumer liquid fuel prices. We find that on average gasoline prices are modified once a week and the distribution of price changes displays a M-shape as predicted by a menu-cost model. Using a reduced form state-dependent pricing model with time-varying random thresholds, we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0.77 for diesel and 0.67 for petrol. The duration for a shock to be fully transmitted into prices is about 10 days. There is no significant asymmetry in the transmission of wholesale price to retail prices.

Patent Disclosure in Standard Setting

Posted by D. Daniel Sokol

Bernhard Ganglmair, University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics and Emanuele Tarantino, University of Bologna - Department of Economics identify Patent Disclosure in Standard Setting.

ABSTRACT: In a model of industry standard setting with private information about firms' intellectual property, we analyze (a) firms' incentives to contribute to the development and improvement of a standard, and (b) firms' decision to disclose the existence of relevant intellectual property to other participants of the standard-setting process. If participants can disclose after the end of the process and fully exploit their bargaining leverage, then patent holders aspire to disclose always after the end of the process. However, if a patent holder cannot rely on the other participants to always contribute to the process, then it may be inclined to disclose before the end of the process. We also analyze under which conditions firms enter cross-licensing agreements that eliminate the strategic aspect of patent disclosure, and show that, in an institutional setting that implies a waiver of intellectual property rights if patents are not disclosed timely, firms aspire to disclose before the end of the process. Finally, we study the effect of product-market competition on patent disclosure.

Retailers and Consumers. The pass-through of import price changes

Posted by D. Daniel Sokol

Eike Berner (Department of Economics, Christian-Albrechts-Universitat Kiel) and Laura Birg (Department of Economics, Christian-Albrechts-Universitat Kiel) analyze Retailers and Consumers. The pass-through of import price changes.

ABSTRACT: This paper uses German household data on apparel purchases to show that, conditional on income, households differ with respect to their shopping outlets and the prices they pay. We estimate that high-price retailers are not a¤ected by changes in import prices. By contrast, the pass-through for low-price retailers is 53% within 3 months. Consequently, pass-through rates for low-income households are 58%, significantly larger than those for high-income households. We then present one explanation for these observations in a theoretical model with vertical product differentiation due to bundling an otherwise homogeneous imported good with services. Following an import price shock, retailers who sell cheaper unbundled products change prices more than retailers who sell a higher-priced bundle of product and service.

Exclusive Dealing and Market Foreclosure: Further Experimental Results

Posted by D. Daniel Sokol

Claudia Landeo (University of Alberta, Department of Economics) and Kathryn Spier (Harvard Law School) analyze Exclusive Dealing and Market Foreclosure: Further Experimental Results.

ABSTRACT: This paper reports further experimental results on exclusive dealing contracts. We extend Landeo and Spier’s [2009] work by studying Naked Exclusion in a strategic environment that involves a four-player, two-stage game. In addition to the roles of seller and buyers, our experimental environment includes the role of a potential entrant (a fourth passive player). Our findings are as follows. First, payoff endogeneity increases the likelihood of exclusion. Second, communication between the potential entrant and the buyers increases buyers’ coordination on their preferred equilibrium (equilibrium with entry) and hence, reduces the likelihood of exclusion. Entrant-buyers communication also induces more generous offers.

Call for Papers - The Journal of Antitrust Enforcement (OUP)

Posted by D. Daniel Sokol

Call for Papers - The Journal of Antitrust Enforcement (OUP) Oxford University Press is delighted to announce the launch of a new competition law journal dedicated to antitrust enforcement. The Journal of Antitrust Enforcement forms a joint collaboration between OUP, the Oxford University Centre for Competition Law and Policy and the George Washington University Competition Law Center.

The Journal of Antitrust Enforcement will provide a platform for cutting edge scholarship relating to public and private competition law enforcement, both at the international and domestic levels.

The journal covers a wide range of enforcement related topics, including: public and private competition law enforcement, cooperation between competition agencies, the promotion of worldwide competition law enforcement, optimal design of enforcement policies, performance measurement, empirical analysis of enforcement policies, combination of functions in the mandate of the competition agency, competition agency governance, procedural fairness, competition enforcement and human rights, the role of the judiciary in competition enforcement, leniency, cartel prosecution, effective merger enforcement and the regulation of sectors.

Submission of papers: Original articles that advance the field are published following a peer and editorial review process. The editors welcome submission of papers on all subjects related to antitrust enforcement. Papers should range from 8,000 to 15,000 words (including footnotes) and should be prefaced by an abstract of less than 200 words.

General inquiries may be directed to the editors: Ariel Ezrachi at the Oxford CCLP or William Kovacic at George Washington University. Submission, by email, should be directed to the Managing Editor, Hugh Hollman.

Further information about the journal may be found online: http://www.oxfordjournals.org/our_journals/antitrust/

Exclusive Dealing and Market Foreclosure: Further Experimental Results

Posted by D. Daniel Sokol

Claudia Landeo (University of Alberta, Department of Economics) and Kathryn Spier (Harvard Law School) analyze Exclusive Dealing and Market Foreclosure: Further Experimental Results.

ABSTRACT: This paper reports further experimental results on exclusive dealing contracts. We extend Landeo and Spier’s [2009] work by studying Naked Exclusion in a strategic environment that involves a four-player, two-stage game. In addition to the roles of seller and buyers, our experimental environment includes the role of a potential entrant (a fourth passive player). Our findings are as follows. First, payoff endogeneity increases the likelihood of exclusion. Second, communication between the potential entrant and the buyers increases buyers’ coordination on their preferred equilibrium (equilibrium with entry) and hence, reduces the likelihood of exclusion. Entrant-buyers communication also induces more generous offers.

The Competition and Markets Authority: A New Era for U.K. Competition Law Enforcement?

Posted by D. Daniel Sokol

Paula Riedel & Anna Mitchell (Linklaters) ask The Competition and Markets Authority: A New Era for U.K. Competition Law Enforcement?

ABSTRACT: Since October 2010, it has, in essence, been a certainty that a merger between the OFT and the CC would go ahead, notwithstanding the fact that they are both relatively small, low-turnover agencies, and the obvious cost savings arising out of a merger between them are not immediately apparent. Indeed, it is estimated that the creation of a single CMA entity will only save the Government, on average, approximately £30 million (less transitional costs) over a 10-year period. Therefore, while the original impetus may have been one of cost cutting and the creation of efficiencies, the merger may in reality be seen by many as more of a philosophical change, driven by the fact that the Government believes a single body, without any internal rivalry or differing views, would be a stronger advocate for competition in the United Kingdom than the current regime.

The responses to the Government's consultation indicated that those who use the system are largely skeptical about the reforms, especially the controversial loss of the "second pair of eyes" which necessarily comes from having two reviewing authorities. Indeed, the existing U.K. competition regime is highly regarded internationally, with the CC achieving the highest rating of five stars and the OFT receiving 4.5 stars in a recent Global Competition Review rating report. In particular, the U.K. merger regime has been commended for its technical competence, independence from the political process, transparency and access to decision-makers, and accountability and robustness of decisions, making lawyers and businesses alike nervous about the loss of the current regime.

The Regulation/Competition Interaction

Posted by D. Daniel Sokol

Javier Tapia, Centre for Regulation and Competition, Universidad de Chile and Despoina Mantzari, University College London-Faculty of Laws have written on The Regulation/Competition Interaction.

ABSTRACT: Government regulation in markets is ubiquitous and takes many forms. In this paper we are concerned with two forms of such intervention- economic regulation and competition law and policy - and their relationship within the context of EU regulated markets (i.e. energy, telecommunications, water, railways). During the last 30 years, these sectors have gone through a major transformation (conventionally, but mistakenly called ‘deregulation’) that has altered both structures and legal frameworks. The causes of this reform mix a number of legal, economic, political and technological rationales that we group in two dimensions: institutional and substantive. From an institutional perspective, the old centralised system of control, focused exclusively on the state and the firms, has given place to a new equilibrium characterized by a multiplicity of actors and a decentralised regulatory paradigm. From a substantive perspective, the system is characterised by the use of competition law enforcement as a means to ‘control’ the outcomes of decentralisation. Within this setting, competition law has been used in a ‘regulatory fashion’ more than in any other jurisdiction. After thoroughly exploring these developments, we demonstrate that competition is not the antithesis of regulation, but a form of control, and further call for attention to the increased reliance on ‘regulatory antitrust’ in Europe.

Informing Consumers about their own Preferences

Posted by D. Daniel Sokol

Roman Inderst (Johann Wolfgang Goethe-University Frankfurt and Imperial College London) and Martin Peitz (University of Mannheim) discuss Informing Consumers about their own Preferences.

ABSTRACT: We analyze a model of monopolistic price discrimination where only some consumers are originally sufficiently informed about their preferences, e.g., about their future demand for a utility such as electricity or telecommunication. When more consumers become informed, we show that this benefits also those consumers who remain uninformed, as it reduces the firm’s incentives to extract information rent. By reducing the costs of information acquisition or forcing firms to supply consumers with the respective information about past usage, policy can further improve welfare, as contracts become more efficient. The last observation stands in contrast to earlier findings by Cremer and Khalil (American Economic Review 1992), where all consumers are uninformed.

Too Much Information Sharing? Welfare Effects of Sharing Acquired Cost Information in Oligopoly

Posted by D. Daniel Sokol

Juan-Jose Ganuza (Universitat Pompeu Fabra) and Jos Jansen (University of Cologne) ask Too Much Information Sharing? Welfare Effects of Sharing Acquired Cost Information in Oligopoly.

ABSTRACT: By using general information structures and precision criteria based on the dispersion of conditional expectations, we study how oligopolists' information acquisition decisions may change the effects of information sharing on the consumer surplus. Sharing information about individual cost parameters gives the following trade-off in Cournot oligopoly. On the one hand, it decreases the expected consumer surplus for a given information precision, as the literature shows. On the other hand, information sharing increases the firms' incentives to acquire information, and the consumer surplus increases in the precision of the firms' information. Interestingly, the latter effect may dominate the former effect.

The Microsoft Case and Google

Posted by D. Daniel Sokol

Stephen D. Houck (Menaker & Herrmann) has written on The Microsoft Case and Google.

ABSTRACT: In the wake of the U.S. government's unsuccessful prosecution of IBM (begun in 1969 and dropped in 1982), many knowledgeable observers believed that §2 of the Sherman Act was no longer relevant and was too cumbersome to apply to fast-moving high-tech companies. The government's prosecution of Microsoft, settled in 2001, proved them wrong. Government antitrust enforcement agencies are now considering the applicability of §2 to certain of Google's practices, like its display of thematic search results. It is crucial that the government get it right. For one thing, an unsuccessful §2 enforcement action is an enormous drain on resources that means significant lost opportunity costs for the government agency. An erroneous enforcement decision also risks undermining hard-won, infrequent government victories like Microsoft by creating precedents that will make future §2 enforcement even more difficult than it already is today. And, most importantly, an ill-conceived §2 enforcement action, especially in a rapidly evolving business like search, may actually impair consumer welfare by deterring and distorting innovation. This is a particular concern where the objective of those who encourage government action is to protect less efficient competitors rather than consumers.

AN EMPIRICAL ANALYSIS OF SECONDARY LINE PRICE DISCRIMINATION MOTIVATIONS

Posted by D. Daniel Sokol

Hagit Bulmash (Tel Aviv University) undertakes AN EMPIRICAL ANALYSIS OF SECONDARY LINE PRICE DISCRIMINATION MOTIVATIONS.

ABSTRACT: The prohibition of secondary line price discrimination stated in the Robinson-Patman Act probably still affects more business decisions than any other antitrust law. This article applies a new methodology, developed in the study, of systematic content analysis of all court decisions of Robinson-Patman cases published from 1990 to 2000 (inclusive), traced using the lexis.com database, in order to expand our knowledge regarding such discrimination. I present two empirical claims concerning the act. First, I analyze the preliminary procedures conducted in secondary line private complaints, showing that the procedures themselves can harm competition among suppliers, encourage collusion, and increase monopoly prices. Second, I fill in the factual background to show how the act harms consumers and competition, and, by contrast, how the use of secondary line discrimination can encourage competition. The results help to understand the reasons why suppliers employ such discrimination and its affect on business behavior and competition. They also help to explain the motivations of those discriminated purchasers to file a complaint for such discrimination. The results show empirically why the Robinson-Patman Act should be repealed in its entirety and why it would not be sufficient to dismiss private complaints filed to courts, or to interpret it in keeping with broader antitrust policies.

REPUTATIONAL PENALTIES TO FIRMS IN ANTITRUST INVESTIGATIONS

Posted by D. Daniel Sokol

Stijn van den Broek,; Ron G.M. Kemp,; Willem F.C. Verschoor,; and Anne-Claire de Vries (NMA) report on REPUTATIONAL PENALTIES TO FIRMS IN ANTITRUST INVESTIGATIONS.

ABSTRACT: We estimate the impact of legal penalties imposed on Dutch listed firms targeted by competition authorities from 1998 to 2008 on a firm's stock market value. On average, firms lose 2.3 percent of their market values when an antitrust investigation is uncovered. This corresponds to a total value loss of €4.3 billion. Overall, the fines imposed by the legal system contribute to only 12 percent of this total value loss. Another 55 percent of the total value loss is explained by the lost conspiracy-generated profits. We find that the residual 33 percent of the total value loss is explained by reputation loss. Thus, cartel offenders are disciplined largely through market-induced reputational penalties, not through legal penalties.

VERTICAL THEORY OF HARM IN A HORIZONTAL MERGER: THE FRIESLAND FOODS/CAMPINA CASE

Posted by D. Daniel Sokol

Jurjen J.A. Kamphorst (Department of Economics, Erasmus School of Economics and Tinbergen Institute) and Vitaly Pruzhansky analyze VERTICAL THEORY OF HARM IN A HORIZONTAL MERGER: THE FRIESLAND FOODS/CAMPINA CASE.

ABSTRACT: In December 2008, the European Commission (EC) cleared the proposed merger between the two largest dairy cooperatives in the Netherlands. The transaction raised several interesting economic issues that were hotly debated during the EC investigation. In this article, we review the EC's proposed theory of harm relating to the impact of the merger on the market for raw milk in the Netherlands and the ability of the parties' competitors to source raw milk (a critical input) post-merger. We show that the EC's theory is unlikely to be supported by economic theory and facts of the market.

The Role of the Hearing Officer in Competition Proceedings Before the European Commission

Posted by D. Daniel Sokol

Wouter P. J. Wils - King's College London - School of Law; European Commission explores The Role of the Hearing Officer in Competition Proceedings Before the European Commission.

ABSTRACT: This paper deals with the role of the Hearing Officer in competition proceedings conducted by the European Commission for the enforcement of Articles 101 and 102 TFEU (antitrust proceedings) and under the EU Merger Regulation (merger proceedings). After a brief discussion of the status of the Hearing Officer, the paper examines the various powers and tasks of the Hearing Officer (other than the organisation and conduct of the oral hearing, which is discussed in a parallel paper 'The Oral Hearing in Competition Proceedings before the European Commission', also forthcoming in World Competition, Vol. 35, No. 3, September 2012 and accessible at http://ssrn.com/author=456087).

CALL FOR PAPERS: Sixth Annual Conference on Competition Law,Economics and Policy in South Africa, 6 September 2012

Posted by D. Daniel Sokol

CALL FOR PAPERS: Sixth Annual Conference on Competition Law,Economics and Policy in South Africa

6 September 2012

University of the Witwatersrand, Johannesburg

CALL FOR PAPERS

This annual conference on competition law, economics and policy is the leading conference in South Africa at which practitioners (lawyers and economists), academics and policy analysts review cases and issues in the evolving competition jurisprudence.

There have been many developments in South African competition law over the past year, and papers are welcome on these, as well as on questions of competition law and economics more generally.

We particularly invite submissions for papers on three themes: Competition in the healthcare sector – the state and nature of competition in various healthcare sub-sectors in South Africa, its potential role and its limitations in producing optimal outcomes in private healthcare. The role of competition law and policy in the economy in light of the Constitutional Court decision/s. International developments in competition law and economics.

Those wishing to present a paper should send an abstract of no more than 250 words.

Abstracts should be emailed by 29 June 2012 to:

Julie Dunsford: [email protected] Tel: 011 7178468 Fax: 086 5535549

Selection of abstracts

The selection of abstracts will be made by the second week of July and completed papers will be due by 13 August 2012.

Conference registration

General delegates will need to register by 13 August with [email protected] A conference registration fee of ZAR500 per general delegate is payable (10% discount for group of 3 or more delegates from the same organisation). Invited speakers and selected presenters, chairs and discussants will be registered on a complimentary basis.

The Removal of Dishonesty from the Cartel Offence and the Publication Defence: A Panacea?

Posted by D. Daniel Sokol

Ruchit Patel (Cleary Gottlieb) asks The Removal of Dishonesty from the Cartel Offence and the Publication Defence: A Panacea?

ABSTRACT: In March 2011, the U.K. Government Department for Business, Innovation and Skills ("BIS") consulted upon proposed reforms to the U.K. competition regime. The reforms proposed in the Consultation generated a great deal of interest primarily because certain of them had the potential to represent a step change in the regime (e.g., one of the proposals was to change to a prosecutorial model of antitrust enforcement). Following the Consultation, BIS decided to progress a more modest set of reforms (e.g., BIS chose to retain the administrative model of antitrust enforcement). Even the most high-profile reform, the merger of the Office of Fair Trading ("OFT") and the Competition Commission into a single Competition and Markets Authority ("CMA"), is unlikely to change much in practice, given that it will ostensibly be structured so as to ensure no change to the fundamental way in which decisions are made.

While little may have changed for businesses, the Government's reforms could have more significant repercussions for individuals. The removal of the dishonesty element from Section 188 of the Enterprise Act 2002 (the "cartel offense") has the potential significantly to change the nature of the criminal cartel regime because it seems to lower the threshold for a successful conviction. This article examines the basis for reform, analyzes whether the decisions adopted in BIS's Response are likely to have their desired impact, and considers a possible alternative for legislation

Functional Separation in the U.K. Competition Regime

Posted by D. Daniel Sokol

Renato Nazzini (Univ. of Southampton) addresses Functional Separation in the U.K. Competition Regime.

ABSTRACT: In March 2012, the U.K. Government published its Response to a consultation on options for reform of the competition regime issued one year earlier, on March 16, 2011. The Foreword to the Response presents the proposed changes as "far-reaching reforms, aiming at creating a competition regime that delivers better outcomes for business, consumers and the economy." In fact, many of the proposals may be described as a desirable "tidy-up" of the system, addressing practical problems that have arisen in the past decade or so.

One change, however, stands out as a deserving the description as a "far-reaching" reform: the merger between the Office of Fair Trading ("OFT") and the Competition Commission into a newly established Competition and Markets Authority ("CMA"). The CMA will combine the functions of the OFT and the Competition Commission. Such a change is certainly significant in the United Kingdom, where business and the legal profession are used to a structural separation model in mergers and market inquiries. Under the current system, the OFT, if a certain threshold is met, refers a merger or a market to the Competition Commission, which is responsible for the final decision.

The perceived benefits of the current system are many but, on the whole, they can be boiled down to two: (1) clear independence of the decision-maker from the "prosecutor," which dispels any suspicion of bias and provides a "fresh pair of eyes" in complex cases; and (2) high quality of decision-making, given that the Competition Commission is structured in such a way as to be able to draw on significant expertise and focus its resources on phase 2 investigations without any other conflicting calls on its priorities.